I have this hobbyhorse about how HENRYs (“high-earners, not rich yet,” a term coined by Shawn Tully of Fortune that I picked up via Justin Fox) are the real barrier to progress on all kinds of fronts: rolling back occupational licensing restrictions, improving human capital policy, increasing the efficiency of the public sector, curbing the pricing power of medical providers, and reforming the tax code. On the last point, my basic case was as follows:
(1) raising marginal tax rates is a terrible way to raise revenue, because it creates work disincentives;
(2) curbing tax expenditures are a much better way to raise revenue;
(3) but (2) threatens the interests of upper-middle-income households, particularly those residing in high-tax jurisdictions in high-cost metropolitan areas, a constituency that tilts to the left but that is important to both of the major political coalitions;
(4) and I argue that the collective political influence of the upper-middle-class is greater than that of the ultra-rich.
I think that the post-cliff tax deal vindicates this basic premise. Suzy Khimm of Wonkblog draws out the following from a new Tax Policy Center report:
The Tax Policy Center has totalled up all the tax changes under the bill and finds that two groups of Americans will have the lowest tax increase. Taxpayers with income between $200,000 and $500,000 and those with income between $10,000 and $20,000, both of whom will see their tax rate increase by 1 percentage point—a smaller hike than any other income group. Even those earning less than $10,000 will see a bigger 1.3 percentage point rate hike. … By comparison, those with income between $500,000 and $1 million will see their taxes go up 2.2 percentage points and those above $1 million will see a 5.2 percentage point hike. So those upper-income Americans whom Congress has deemed to be “middle class” arguably got the best deal under the entire bill.
How can the influence of HENRYs be curbed? It’s not clear. Restrictions on soft money contributions to the major political parties have increased the influence of small-dollar donors, a disproportionately large share of whom are HENRYs. One approach would be to encourage the ultra-rich to stop thinking of HENRYs as allies and to start thinking of HENRYs, particularly credentialed HENRYs like physicians, trial lawyers, and university administrators, as opponents of growth-enhancing reform.