Time to Pay the Price

(2 of 2)

So who will pay those taxes? Obama's plan to target the highest earners has merit, given that almost all income gains in recent years have gone to the top 1%. But because the rich can afford good tax lawyers, there are diminishing returns to increasing their tax rates. Returning to the pre-2001 top rate of 39.6% (from 35% now) would surely bring in more money, but going much higher might not. Also, the bulk of the recent gains at the top of the income spectrum has come from huge paychecks in the financial sector--paychecks that are almost sure to shrink in coming years.

That brings us back to the lucky duckies. Trouble is, they're an even less promising target. The share of pretax income going to the bottom 40% of households dropped from 20% in 1980 to 15.9% in 2005, according to the Congressional Budget Office, and that decline has been counteracted only modestly by tax credits. There's simply not enough money there to close any budget gaps.

So where is the dough going to come from? In 2007, 56% of pretax income went to households making between $70,000 and $250,000 a year, estimates the Census Bureau. That's the upper middle class, broadly defined. If we need more money to keep the country running, here's betting that is where it's going to be found.

Extra Money To read Justin Fox's daily take on business and the economy, go to time.com/curiouscapitalist