Returning from a trip overseas, I find that congressional Republicans are reportedly considering raising the marginal tax rate on people making more than a million dollars a year. The editors of the Wall Street Journal say this new “millionaire’s” bracket could be set at 42-44 percent. They don’t like the idea. Neither do I.
The current top bracket taxes incomes above $470,000 a year (for couples) at 39.6 percent. The Republican tax framework put forward a top rate of 35 percent instead, but left open the option of an additional bracket for “the highest-income taxpayers.” Assuming that the legislators are using a million dollars of taxable income as the cut-off point, then couples making between $470,000 and a million a year would have a lower marginal rate than they do now, while people making more than a million would have a higher marginal rate than they do now.
A proposal like this one would not mean that everyone making more than a million dollars a year would have to pay a higher tax bill. A couple making $1.5 million a year in taxable income would still have a smaller tax bill even with a new 43 percent top tax rate. That’s because it would be paying a lower tax rate on all the dollars it made between $470,000 and one million.*
Republicans are thinking about this “millionaire tax” for, one assumes, two reasons: to bring in revenues so that their bill doesn’t increase the deficit too much, and to blunt charges that their tax cut favors the rich.
Both goals, it seems to me, would be better served by just leaving the top tax rate of 39.6 percent exactly where it is: Don’t cut it for income between $470,000 and one million dollars, don’t raise it for income above one million dollars. Leaving the top tax rate alone would almost certainly raise more revenue than what the Republicans are considering. It would not reduce anyone’s incentive to work, save, and invest compared to today, while the millionaire tax would have a marginally negative effect on those incentives for very high earners (as the WSJ rightly complains).
Which of these two courses—leaving the top marginal tax rate alone, or cutting rates for some of the people now subject to it and raising it for others—would do more to change the perception** that Republican tax plans are tilted in favor of the rich? I can see an argument either way. But leaving the top rate alone would do more to address the argument that critics typically make: that too large a share of the benefits of Republican tax cuts would go to the top one percent. Anyone making more than $470,000 a year is in that top one percent. Leave the top rate alone, and the percentage of tax-cut dollars going to the top one percent will be lower.
* I assume that the Journal is confusing average tax rates and marginal tax rates when it claims that under current law, “Uncle Sam takes nearly half of what a millionaire earns.” As written, that’s not even close to being true.
** This perception is also a reality.