Posted by: Jeff | September 10, 2010

In Which I Shrug at Raising Taxes On the Rich

Over the last twenty-four hours, Annie Lowery and Reihan Salam have been debating the merits of a new income tax bracket for the exceptionally wealthy. Two of Salam’s objections are pretty weak tea, and Lowery’s latest missive dispatches with them quite well. His third concern is that such a policy wouldn’t raise all that much revenue, which has more bite to it. However, it’s not so much an objection as it is a “why is this worth the trouble” question, and Lowery deals with it as such:

This is neither here nor there. It would raise billions of dollars. A dollar is a dollar. And at some point, the government needs to raise money from somewhere. Given the dramatic growth of income inequality, I would argue raising income taxes a bit on the very wealthy is a decent place to look.

Well, yes and no. On the one hand, Salam cited some numbers from Alan Viard at AEI which I actually think undermine his case a bit:

Consider the task of raising an additional $1 trillion over fiscal years 2008 through 2017… [I]f the increase applied solely to taxable incomes above $1 million ($500,000 for singles), marginal rates would need to rise 22 percentage points from their current 35 percent, to 57 percent. If the net were widened to include everyone in the top bracket (couples with taxable incomes above $349,700), the necessary increase would be 13 percentage points, from 35 to 48 percent. Even if the rate increase also applied to the next highest bracket (couples with taxable incomes above $195,850), the required increase would still be 10 percentage points.[12] Such rate increases would put marginal rates back to levels not seen in decades; the top rate has been below 40 percent since 1987.

That last sentence sounds dramatic, but it’s not as if the U.S. spent all of the 20th century as a dystopian economic hell-hole until Reagan came along. Now, I’m with Salam that jacking the rate up to 57 percent would be very bad, even if it’s just on the literal millionaires. But an increase to 48 percent for couples making over $349,700, while enough to make me nervous, doesn’t strike me as crazy. Of course, on economics I’m an educated layman, so what the hell do I know? (I mean that seriously, not snarkily.)

I’d also be fine with dropping the rate to 45 percent and including couples making over $195,850. Of course, that option would violate Obama’s promise to not raise taxes on couples making less than $250,000. Which gets us into some interesting-but-squishy questions about who Americans view as poor, middle class, and rich, and thus who it is or isn’t acceptable to raise taxes on. For myself, I think it’s nuts to suggest that a couple making $190,000 a year is too economically pressed to be able to shoulder a higher tax burden. But again, that’s me, and plenty of Americans seem to think otherwise. And that brings us to the first problem with Lowery’s case, since she herself didn’t recommend going any further down the economic ladder than those making $410,000 a year, and didn’t suggest a tax rate higher than 40 percent. So to get any meaningful bang for the buck out of this policy — with “bang for the buck” defined as $1 trillion over ten years — we’d have to cut significantly deeper than Lowery, the Democrats or Obama seem willing to go.

That gets us to the slightly more esoteric problem of whether we’re taking up too much political oxygen talking about suboptimal policies. Liberals have been jumping on the new-tax-bracket-for-millionaires bandwagon because the issue carries a populist charge and the political optics are good. But if the above is correct, the optics only remain good so long as the policy is structured in a way that makes it more of a symbolic sideshow than a genuine contribution to our revenue problem. What if there are alternatives that are just as politically feasible as Lowery’s new tax bracket, that could bring in much more revenue, but just happen to lack the same instinctive appeal to the liberal base? We only have so much time and energy in the day, so shouldn’t we be discussing those instead?

Like, for instance, eliminating the cap on taxable income for Social Security. I confess I’m not sure what the revenue take would be from that, but Dylan Matthews’ Research Desk suggested a while back it could come close to $100 billion per year. That would put it in the ball park of $1 trillion over ten years, which strikes me as obviously preferable to the millionaires’ tax bracket as Lowery constructs it. And it’s also a policy that appears to be even more politically do-able.

Again, that last point isn’t an objection to a new millionaires’ tax bracket, but it is a reason to drop it a few notches on the list of priorities.

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