We Need More Tax Brackets

Income taxes have gone up for the first time in 20 years, but as the Huffington Post reports, only 1 percent of taxpayers are affected:

Forget the 1 percent, the fiscal cliff deal is all about the .7 percent. That’s the slice of Americans who will be affected by Congress’ new definition of “wealthy,” according to a new analysis from the Tax Policy Center, a nonprofit tax research group.

The centerpiece of the deal passed by Congress on Tuesday includes higher income taxes on individuals who make at least $400,000 and couples who make more than $450,000. The tax rate for those groups jumps to 39.6 percent from the current 35 percent.

Of course, income taxes were only ever going to go up on the wealtiest Americans: There was, and is, no appetite for significant middle-class tax hikes, though they will be necessary in the medium-term.

With that said, I’m a little disappointed that there wasn’t more creativity with regards to how we’re raising taxes on the rich. I’ve said this before, but it makes no sense to include all income above a given limit in the same tax bracket. In 1960, there were 17 brackets above $35,000—roughly $250,000 in today’s dollars—going up to $400,000 in annual income, or $3 million, adjusted for inflation. Now, there’s a single one.

This presents an obvious problem for liberals—by placing every high income person in one bracket, it binds the interests of the sorta-rich, the rich, and the super-rich. Instead of a small number of truly wealthy people pushing for lower tax rates, you have a broader coalition of the well-off. Which is to say that if tax reform is on the table this year, then there needs to be a push for more brackets at higher incomes. It wouldn’t make tax calculation complicated—it would still be a matter of simple arithmetic to figure out your unadjusted income tax burden—and it would move things in a small, but meaningfully, progressive direction.

Comments

No more brackets.

And no, I'm not suggesting a flat tax. Rather, a curved tax. Start a 0% up to, say, $15,000 (whatever) and curve it up to 50% at $2m based on a simple, constant derivative. Anyone with precalculus knows how to do this in the abstract and once it's decided upon it's simple arithmetical operations as well.

It's simple, but it's not flat.

@sj660, exactly. When filing income tax, everyone either reads their tax off a tax table or lets the software calculate their tax -- the formula could be simple or complex, but they're still just going to plug in the number that's calculated for them. Even most members of Congress don't understand how marginal rates work, so why not ditch the concept completely and get something that's more progressive and works the way most people think marginal rates work already?

sj660 and rickter: excellent points. I have no idea why this isn't done already. Tax rates should absolutely be a curve. Perhaps this has never been done because it better serves politicians to sow resentment and further divide the populace along class lines.

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