Ezra Klein on Clinton-Era Tax Rates

by Reihan Salam

In an interview with Chris Wallace of Fox News Sunday, Los Angeles Mayor Antonio Villaraigosa said the following about President Obama’s goals for tax policy in a second term:

He’s got a plan that will say let’s take taxes on the top 2 percent of America back to where they were under President Clinton when he had an economy that generated 23 million jobs and importantly, that started with deficits and ended with surpluses.

As Ezra Klein of Wonkbook wrote earlier today, however, this isn’t an accurate characterization of President Obama’s preferred approach:

(1) The Obama administration has pledged to preserve Bush-era tax rates for all income under $250K, so a household earning $251K will pay Bush-era tax rates rather than Clinton-era tax rates on the lion’s share of its income. These tax cuts, backed by both parties, create far less of an incentive for economic activity relative to revenue loss than the high-income rate reductions, as Alan Viard of the American Enterprise Institute has explained

(2) Households earning more than $250K will be subject to a number of other tax increases, some of which might prove quite steep, e.g., the value of itemized deductions will be capped at 28 percent, the top marginal tax rate under the 1986 tax reform, and changing the tax treatment of carried interest. I would also take account of the increase in the Medicare tax and the Unearned Income Medicare Contribution.

Ezra concludes with the following:

The end result is that he wants to raise almost twice as much money from folks making more than $250,000 than he’d get from simply letting the Bush tax cuts expire for this group. So overall taxes for them are going to be much higher than simply going back to the  Clinton-era rates would suggest.

While many argue that the Clinton-era increase in the top marginal tax rates on ordinary income had only a modest economic impact, the increase the president has in mind is much larger, and so it seems plausible that it would have a more deleterious effect on work incentives. 

In 2010, before President Obama approved a temporary extension of the Bush-era tax rates, Viard addressed a closely related subject.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.