A Totally Crazy Way To Raise Tax A Totally Crazy Way To Raise Taxes on the Rich

Moneybox
A blog about business and economics.
Nov. 24 2012 10:06 AM

A Totally Crazy Way To Raise Taxes on the Rich

Jonathan Weisman reports that members of congress are contemplating a new terrible idea that might provide some kind of face-saving way for Republicans to agree to higher taxes on the rich:

One possible change would tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula. That plan would allow Republicans to say they did not back down in their opposition to raising marginal tax rates and Democrats to say they prevailed by increasing effective tax rates on the rich. At the same time, it would provide an initial effort to reduce the deficit, which the negotiators call a down payment, as Congressional tax-writing committees hash out a broad overhaul of the tax code.

This would create exactly the kind of super-high marginal tax rates that I'm always mocking confused rich people for believing in. Under this plan, a person with an Adjusted Gross Income of $399,995 is going to have a higher after tax income than someone with an Adjusted Gross Income of $400,005. And it's not a small difference! You're talking about a tax penalty in the tens of thousands of dollar range for popping slightly above $400,000 rather than staying slightly below.

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It's hard to know whether in reality this would have a catastrophic impact or if in practice people are going to spend a couple of years being confused and not able to muster a proper behavioral response. But it's a ridiculous idea and even though it'd be interesting to have the data on how people respond to the new absurd situation, it's probably better not to find out.

It continues to be the case that the sensible solution here is to first let all the Bush tax cuts expire then let the Obama administration propose a middle class tax cut relative to the new baseline. House Republicans will pass the new tax cut (with some modification) and then will proceed to complain that Obama has left taxes far too high and the long-term trajectory of tax policy will be driven by who wins subsequent elections rather than endless rounds of supercommittees and deals and technically unsound face-saving compromises.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.