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November 26, 2012 8:40 AM Throwing the 1% Under the Bus for the 0.1%?

By Joshua Tucker

The New York Times reports the following proposal is on the table in negotiations over raising additional tax revenue so that Republicans can say they have not allowed marginal tax rates to rise:

One possible change would tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula. That plan would allow Republicans to say they did not back down in their opposition to raising marginal tax rates and Democrats to say they prevailed by increasing effective tax rates on the rich

The article then goes on to report how much revenue this (and other) proposals would raise, but it misses what I think is the most important point of this proposal: if the Times is correct, it suggests that Republicans are apparently now willing to raise taxes on the rich in order to avoid raising them more on the super-rich.

Here’s my logic. This change will have no effect on anyone making under $400,000 a year. But for everyone making over $400,000 a year, their tax bill will go up by the exact same amount because the proposal will only change how income up to $388,350 (where the top rate of 35 percent currently kicks in) is taxed. The increase in one’s tax bill will therefore be the same if you are making $400,000/year, $4 million/year, or $40 million/year. This would obviously not be the case if the highest bracket reverted to the Clinton-era level of 39.6%. Just to give an extremely simple example without taking into account deductions or the like, avoiding a 4.6% increase in income over (let’s say) $400,000 a year would save someone making $500,000 a year $4,600; it would save someone making $5 million/year $211,600; and someone making $50 million/year would save a whopping $2,281,600!

So maybe this is what the post-Citizens United world is going to look like? An anti-tax party that is willing to stomach a tax increase for those making $400,000/year + so long as they protect the super-rich from an even bigger tax increase? From a campaign finance perspective, perhaps this makes sense: someone making $500,000 a year can not single-handedly keep your campaign afloat; someone who can write you a $5 million check, however, possibly can.

[Cross-posted at The Monkey Cage]

Joshua Tucker is a Professor of Politics at New York University.
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Comments

  • geodahir on November 27, 2012 11:01 AM:

    political contributions are an alternative form of taxation, where the extremely wealthy pay a small tax, the contribution, to greatly reduce their alternative tax rates. Thus, it operates in proportion to the extent of the wealth. And it will always be the essential nature of wealth that the more wealthy will always sell out the less wealthy, as extreme wealth only serves the purpose of status.

  • Amir Tavakkol on November 27, 2012 11:06 AM:

    Charging 35% tax rate on the entire income will only have a minor effect in revenue generation, because it will only accelerate reaching the average tax rate of 35%. Barring deductions and exemptions, technically all incomes above $400,000 would reach this average tax rate sooner or later.

  • majun on November 27, 2012 3:12 PM:

    Without actually seeing the proposal, I am assuming that it is a return to the bubble tax of the 1986 reforms, where they ostensibly had two tax rates, but at the high end a third tax rate kicked in (still progresssive) till the bill on the rich made the effective tax rate the same as the marginal tax rate (28%), and then was dropped. So, nobody paid an effective tax rate above 28%, but everyone over a certain level paid 28% as both their marginal tax and effective tax. As you know, under the usual progressive system nobody ever pays an effective tax rate that equals the top marginal rate.

    To do otherwise would be just plain stupid. If all income suddenly became taxed at the top marginal rate, as if by magic, that really would be an incentive for some portion of the population to forego raises and possibly stop working for the last two or three months of each year. To do otherwise would be to decrease their actual take home pay. Such a plan would have the effect of making one of the great myths about taxation into a reality.