It's All About the Tax Brackets

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More and higher tax brackets might have stopped the shiny suit era from happening.

Conservatives might think otherwise, but the liberal focus on repealing the upper-income Bush tax cuts has less to do with higher taxes for their own sake, and more to do with revenue—we need it—and basic distributional concerns: The rich have been well-served by the broad economic trends of the last thirty years, taking a huge percentage of all income produced since 1979. Higher taxes are a way of adding more progressivity into the system—funds raised by a large tax burden on the rich are then funneled into more and better public services for ordinary people.

But progressives ought to have another concern on top of this. One of the great conservative wins of the last thirty years was flattening of tax brackets. 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. The tax-reform package of 1986—widely cited as the inspiration for today's push for a "grand bargain"— eliminated a huge swath of brackets in the name of simplicity. From then on, the highest earners fell within a single tax bracket. After 1986, this was anyone making more than $56,000 (in inflation-adjusted dollars). After 1990, it was $135,000, and after Bill Clinton's 1993 tax package, it was $370,000.

It's not hard to grok the political problem here: By placing every high income person in a single bracket, it ties together the interests of the sorta-rich, the rich, and the super-rich. Now, instead of a small number of truly wealthy (and generally unsympathetic) people pushing for lower tax rates, you have a broader coalition of well-off people.

I'm not an advocate of using public policy to stick it to political opponents, but if I were, this would be one area of interest. Instead of using tax reform to flatten brackets or "broaden the base," you would create more brackets on the higher end. Indeed, you could keep the current, 35-percent rate—which begins at income over $379,000—and institute new brackets at $500,000, $1 million, and greater than $5 million. This would maintain progressivity, bring in the necessary revenue, and fracture a part of the coalition for lower tax rates on the wealthy.

The obvious rejoinder is that this is too "complicated." This might have been true before the age of computers, but now, calculating taxes owed is—for the vast majority of people—a simple issue of plugging numbers into a formula. This would only complicate things for the people who already devote considerable time and effort to avoiding taxes (see: Willard Mitt Romney).

The flattened tax brackets for the rich are a vestige of Reagan-era policy that continues to cause problems for progressives today. As an exercise in political power, it's worth trying to roll them back.

Comments

Why not in fact do what many countries do and replace the series of fixed marginal-rate brackets with (smaller) series of linear marginal-rate brackets? Makes for a much smoother effective-rate curve, and really, a*x^2 + b*x + c is something anyone with a calculator can deal with.

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