Image: Taxes © Peter Gridley, Photographer

The goodness of work, driven by a healthy ambition, is what makes America tick.

It's an idea deeply embedded in our national psyche. Waves of pilgrims and immigrants didn't cross the oceans to sign up for welfare checks; they came for the opportunity to earn a better life through blood and toil.

When that inner fire is extinguished, economies suffer. Innovation stalls. Vitality fades. In a modern context, budget deficits widen as tax revenues dwindle, benefit spending explodes, and the masses clamor for redistributive policies to keep the fiscal charade going. Debt accumulates. Panics strike. In other words, the situation being faced over in Europe as a culture of leisure mixes with a bloated welfare system and a "soak the rich" mentality to disastrous effect.

The United States is on the same dangerous path. Industrious upward mobility is being replaced by idleness funded by foreign bondholders and a narrowing group of wealthy taxpayers. Too few are feeling the sting of Uncle Sam's spendthrift ways. And too many are replacing private-sector wages with government handouts.

The only way out is to stop the coddling and "tax" the "poor." Here's what I mean, and why.

Paying their fair share

I'm playing with the definitions here, while trying to make two big points.

Anthony Mirhaydari

Anthony Mirhaydari

The first is that America is on an unsustainable fiscal course. The debt/deficit problem is acute. Each day, the national debt hits a new high. It stands at nearly $16.8 trillion, or more than $53,100 for every man, woman and child in this country.

Yet only the opposition party in Washington has set a goal of balancing the budget. And even then, the Republican House budget proposal doesn't balance for 10 years. Democrats, both in Congress and in the White House, don't believe even that is a priority. The proposal from Senate Democrats never balances and would run a deficit worth 2.1% of gross domestic product in 2023.

There are no easy fixes.

We need to cut spending on entitlement programs and reduce the cost of health care, neither of which is popular with voters. And we also need to face up to the reality that you can't close a deficit and control government spending when roughly half the country isn't paying federal income taxes.

Polls suggest Americans support only "solutions" such as eliminating foreign aid and raising taxes on the rich. That won't solve the problem. The tax hikes on the wealthy included in the fiscal cliff deal back in January will pull in only around $68 billion a year. The current annual budget deficit is more than $1 trillion.

An analysis by the Third Way policy group found that even if we hit the rich with every realistic tax hike, the national debt would still double over the next 30 years. Sorry folks, that math just doesn't work.

Moreover, even before January's tax hikes, the rich were carrying a greater and greater share of the burden. According to the Congressional Budget Office, in 2009 the top 20% of households by income paid 94.1% of all federal income tax liabilities -- up from 65% in 1979. Compare this with the declining share for the middle 20% (2.7% versus 10.7%) and the bottom 20% (-6.6% versus 0%, due to increased tax credits).

These trends outpace the divergence in wages over this time. In other words, the tax code has become increasingly progressive and redistributive.

The fact is, this may be a government by the people and for the people, but it it's being funded by fewer and fewer people. The data suggest a household can bring in around $60,000 without paying any federal income tax at all. (It would still pay Social Security and Medicare taxes.)

By the numbers, that's a middle-class income. But for income-tax purposes, it's too poor to pay.

The risk is that a tyranny of the majority will be tempted to tax even more wealth from top earners in response to the crummy economy, which will only make things worse for everyone.

Skin in the game

To close the deficit, spending will need to be cut (see my recent column "Why we need 'death panels'" for one idea). We'll also need to broaden the tax base so that even low-income households have some skin in the game. We had a more balanced distribution of the income tax burden when President Bill Clinton and the Republicans in Congress ran budget surpluses and the economy soared -- despite the fact that income shares between the rich and poor were more unequal then than they are now.

If we would have rolled back all the Bush tax-rate cuts for everyone in January -- instead of just the rich -- we would've bagged more than $100 billion a year in additional revenue. If we would've allowed all the then-scheduled tax hikes to hit, including higher estate taxes, it would've been worth a total of roughly $400 billion a year -- or 40% of the current deficit. 

Ideally, if policymakers can get the economy going again, and regain the 6 million full-time jobs we've lost since 2007, the tax base will naturally to broaden as more people find better jobs, make more money, rise out of poverty and pay more taxes. (We actually need 11 million new jobs to make up for those and also account for the rise in the population.)

But stopping the relentless and ultimately self-defeating focus on making the rich "pay their fair share" would be a good first step -- since it only further damages business confidence, reduces investment and hiring, and decreases the incentives for entrepreneurs to take risks. When that happens, we all suffer.