Essentially, the Center for American Progress has devised a way to achieve President Obama’s stated goals of raising substantially more revenue from high-earners than under the Clinton-era tax code while leaving virtually all middle-income and low-income households untouched. The centerpiece of the proposal is a sharp increase in capital income taxation. Though I don’t think the CAP plan is the right way forward, it is broadly in line with what I anticipated over the summer.
Back in July, Keith Hennessey made the following observation:
From a pro-growth perspective, lowering marginal income tax rates by raising capital taxation rates is a bad trade. And both the numbers and politics suggest that much of the higher revenues raised from “eliminating tax breaks” would come from higher tax rates on capital rather than scaling back even more popular tax preferences for homeownership, charity, and health insurance.
The CAP plan entails a higher marginal income tax rate on ordinary income and substantially higher capital taxation rates.
Like James Pethokoukis, my preference would be for a reform of capital taxation along the lines of Clayton Christensen’s recent proposal, which we’ve discussed. Regardless, CAP has done us all a service by providing a detailed illustration of what realizing President Obama’s tax reform priorities will likely entail.