Wednesday, March 24, 2010

Bracketing up: HCR, income redistribution and tax reform

David Leonhardt  points out today that the health care bill represents a significant check to the growth of income inequality over the past generation. This point about its tax impact triggered a memory:

A big chunk of the money to pay for the bill comes from lifting payroll taxes on households making more than $250,000. On average, the annual tax bill for households making more than $1 million a year will rise by $46,000 in 2013, according to the Tax Policy Center, a Washington research group. Another major piece of financing would cut Medicare subsidies for private insurers, ultimately affecting their executives and shareholders.

The memory was this: lefty blogger speculation at the dawn of the Obama presidency as to whether Obama would seek to reengineer tax brackets. Nate Silver:
What the discussion over the top marginal tax rate ignores, however (and what Ygelsias picks up upon) is that this rate has been assessed at very different thresholds of income. In 1940, for example, the top marginal tax rate was 81.1 percent -- but this rate only kicked in once you made $5,000,000 or more in income, which is equivalent to about $75,000,000 in today's dollars.

But today, the threshold where the top tax bracket kicks in isn't $75 million, or $5 million, or even $1 million ... it's a mere $357,700. The progressivity of the tax code stops there....

The question, of course, is why there isn't a millionaires tax bracket now ... or even a multi-millionaires tax bracket. I haven't run the numbers, but I'm guessing that if you established a new tax bracket at, say, 40.5 percent, that started at incomes of $1,000,000 or more, this would bring in as much revenue to the government as restoring the $250K tax bracket (which is really $360K now given indexing to inflation) to 39.6 percent, as it was under Clinton.

The new payroll tax does start at $250k and so doesn't create new brackets. But it does suggest the question: will eventual, inevitable deficit reduction-induced efforts to raise taxes aim at a broad-based tax like a VAT or focus on the super-rich?

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