Tuesday, August 31, 2010

More Tax Brackets?

James Surowiecki at the New Yorker makes the case for more widely differentiated tax brackets:

Between 2002 and 2007, for instance, the bottom ninety-nine per cent of incomes grew 1.3 per cent a year in real terms—while the incomes of the top one per cent grew ten per cent a year. That one per cent accounted for two-thirds of all income growth in those years. People in the ninety-fifth to the ninety-ninth percentiles of income have represented a fairly constant share of the national income for twenty-five years now. But in that period the top one per cent has seen its share of national income double; in 2007, it captured twenty-three per cent of the nation’s total income. Even within the top one per cent, income is getting more concentrated: the top 0.1 per cent of earners have seen their share of national income triple over the same period. All by themselves, they now earn as much as the bottom hundred and twenty million people. So at the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.

The current debate over taxes takes none of this into account. At the moment, we have a system of tax brackets well suited to nineteenth-century New Zealand. Our system sets the top bracket at three hundred and seventy-five thousand dollars, with a tax rate of thirty-five per cent. (People in the second-highest bracket, starting at a hundred and seventy-two thousand dollars for individuals, pay thirty-three per cent.) This means that someone making two hundred thousand dollars a year and someone making two hundred million dollars a year pay at similar tax rates. LeBron James and LeBron James’s dentist: same difference.

This is an idea that I think Republicans and Democrats could find common ground on. It's worth keeping in mind from a historical perspective that, when the graduated income tax was introduced in 1913, the highest tax rate only kicked in for those making over $500,000 a year. That would be equivalent to millions of dollars in 2010.

The motivating idea behind raising the income threshold for the top bracket is not class resentment (unless all graduated income schemes are motivated by class resentment) but a reflection of the notion that it may not be the wisest public policy to tax the megarich at the same rates as the uppermost middle class.

Reorganizing tax bracket thresholds could help the GOP create the infrastructure for lowering the taxes of a broader swath of America while still ensuring that the government's bills could actually be paid.

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