How will Obama raise tax revenue?

Robert Reich hypothesizes that Ben Bernanke is helping the Obama administration prepare the ground for new taxes on the wealthy:

But Bernanke also wants to deliver a message to Congress, a message the White House doesn't want to deliver because it's politically awkward: Congress will have to raise taxes on the wealthy in order to finance universal health care and reduce looming budget deficits. Such tax increases won't slow down the economy because the wealthy don't spend that much anyway (that's what it means to be wealthy -- you've already got most of what you need), but may be necessary, at least to ward off inflation fears.

What sort of higher taxes on the wealthy? Bernanke didn't say, of course, but the White House has already floated limits on deductions and seems willing to consider taxing employee-provided health benefits for employees over a certain income. And maybe lifting the cap on Social Security payroll taxes, at least for workers earning over $250,000 a year.

More radical ideas batted around by Matt Yglesias and Nate Silver a couple of months ago: create new tax brackets far above the current top level of $357k -- or make tax brackets "infinitesimal," i.e. ratcheting up proportionately for every extra dollar earned. As Silver pointed out, the current top bracket threshold is anomalously low compared to those of prior eras.

Bracketing up: will Obama soak the superrich?

Given Americans' immersion in low tax ideology, how can Obama fund his ambitious plans long-term? Matthew Yglesias floats an idea that occurred to me years ago:

some day I should write again about the idea of making tax brackets infinitesimal so that there is no “top bracket.” This would have been unworkable 100 years ago, but with computers there’s no reason we can’t do it.

In other words, there should be an algorithm for perfectly progressive tax rates that ratchet up infinitesimally for every dollar earned, rather than bumping up abruptly at fixed thresholds.

More prosaically, Yglesias floats the idea of adding new marginal tax brackets above the current top level ($357k). While he minimizes the potential for raising significant revenue this way, Nate Silver starts the math and finds otherwise:

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.

Brushing this subject without quite hitting on it, meanwhile, Clive Crook gives the rationale for creating new upper-level brackets -- though he himself favors the regressive but broader-based VAT:

Not everybody would regard two-earner households with an income of $250,000 a year as rich; and many of the taxpayers in question have seen their retirement savings, college funds and housing equity destroyed. The scandal of widening inequality that still animates the Democrats' thinking is a story about the top fraction of one per cent of the income distribution, not the top end of the middle class.

I wonder if Yglesias hasn't in fact stumbled on Obama's as-yet-veiled long range tax plans. Obama claims that he is going to tackle the long-term sustainability of the Federal budget; he's meanwhile planning large increases in Federal spending while promising not to raise taxes on anyone earning under $250k; and a core commitment in his campaign was to roll back the galloping rise in income inequality that Crook alludes to. There is a lot of wiggle room to raise taxes on the superrich while staying well below past U.S. norms. It's probably either that or a VAT. Or both...