Throwing the 1% under the bus for the 0.1%?

by Joshua Tucker on November 23, 2012 · 13 comments

in General Politics,Political Economy

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.

{ 13 comments }

teoc2 November 23, 2012 at 8:54 am

what you describe would be the real road to serfdom

Daniel November 23, 2012 at 9:53 am

It is of course not true that this would not raise marginal tax rates. If it is done as stated with a cliff at $400K (which would be really dumb), it means an infinite marginal tax rate at $400K. If it is phased in (more likely), it means a higher marginal tax rate over some range of income.

David Marcus November 23, 2012 at 10:36 am

Yes, and the “range of income” over which that higher marginal rate would apply would be the lower end of the $400,000 and up set of incomes. As the article said, taxing the 1% more in order to avoid taxes for the 0.1%.

cajunjoe November 23, 2012 at 11:42 am

The ‘marginal tax rate’ is the tax on an additional dollar of income, is it not? So the marginal tax rate for incomes above $400K would be 35%, not ‘infinite.’ Right? An ‘infinite’ marginal tax rate really means a confiscatory tax of 100%, and that’s not what is described here, unless I am missing something.

PJR November 23, 2012 at 12:21 pm

cajunjoe, that’s what the GOP probably thinks but the proposal requires a higher marginal rate on some amount of income upon hitting the threshold. If it’s a cliff (as depicted in the NYT, although this is dumb), the tax incurred by earning the one penny of income that puts you over the cliff is thousands of dollars. If there is some type of phase-in (maybe somebody can imagine this) the marginal rate must be higher than 35 percent during the phase-in. Tucker’s message is correct: the proposal clearly tells us who sits behind the inner-most GOP line of defense on tax hikes.

Cajunjoe November 23, 2012 at 1:16 pm

Sorry, but forget about the marginal tax rate for a moment. For a person earning an adjusted gross income of $399,999, the EFFECTIVE tax rate would be something like 26% (just for argument sake, but that’s reasonable). For those whose AGI is $400,000 the effective tax rate would be 35%, as would the effective tax rate for those making $10 million. Tough luck for those in the, say, $400 -500k range, because their taxes would go up substantially compared to what they are now. But you’d have to figure whether their actual taxes paid go up more than raising the top income tax rate to 39.5%. But for those making mega-bucks, it is a lot better than the alternative, 39.5 top marginal rate. I think that’s the point of the article. If you “only” make $500,000 it might be a wash, but if you make $5million, it’s a really good deal.

Cajunjoe November 23, 2012 at 10:08 am

If you also removed the cap on the individual portion of the social security tax, and treated capital gains and dividends as ordinary income above $1Million, how would that change your analysis?

RobC November 23, 2012 at 2:52 pm

The New York Times misreports that tax brackets apply to adjusted gross income. Wrong! They apply to taxable income–equal to AGI minus deductions and exemptions. For high earners, those deductions are almost always substantial, so the amount that “everyone” can earn before the higher rate regime applies should be significantly greater than either $388,350 or $400,000.

Rigor.

Cajunjoe November 23, 2012 at 3:15 pm

Right!

jrhopkin November 24, 2012 at 7:26 am

This is politically a smart move. It creates a perception of the risk of dramatic tax hikes for upper income groups that are outside the 1% and generates solidarity between ordinarily well off folk and the super-rich. This kind of trickery is the only way to keep that solidarity going now the super-rich are on a different planet to everyone else and the gap between the 1% and the next percentile is as big as that between the 99th percentile and the bottom.

Mark November 24, 2012 at 6:08 pm

Actually, you are focused on the wrong gap. I believe the top 1% on income now starts around 375K. There is a world of difference between someone making that for a few years who does not have accumulated wealth and Warren Buffet, Jaime Dimon, John Corzine or even Matt Damon ($16 million for his last Bourne movie) who are able to shield much of their wealth whatever the nominal income tax rate may be.

The Democrats obscure this by calling everyone who makes more than 200K (if single) or 250K (if married) a “millionaire and billionaire” because they need as much money from as many places as they can to fund their programs. Plus, they know their superrich donors can pretty much insulate themselves.

Republicans obscure this for ideological reasons even though the result is that they get branded as the plutocrat party while the Dems draw huge contributions from the same group without any associated taint.

Brian Schmidt November 26, 2012 at 1:58 pm

The OP points out a defining characteristic of the Republican policy – always favor the richer of two groups, even if they’re both part of your constituency.

Estate taxes are a similar proposition – very few estates pay them, and most of the estates that do pay only somewhat exceed the exemption and therefore pay a low effective rate. It’s about the super-rich.

I suspect that a cap on total deductions is similar although I’m not certain about this. Get rich enough and it becomes hard to run up those deductions for anything except charity.

Mark November 27, 2012 at 8:21 am

If the Dems agree to this does this also make them the protectors of the superrich?

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