From the WallStreetJournal.com:
One of the most contentious elements of President Obama’s tax plan is his definition of “wealthy.”
His plan calls for raising the marginal tax rate to 39.6% from 36% on those earning $200,000 or more. The proposal has elicited howls from conservatives who argued that $200,000 doesn’t count as wealthy — especially in major cities like New York and Los Angeles. And they’ve got a point.
But the definitional issue became a crutch, used by a plethora of pundits and politicians to say we shouldn’t raise taxes on the wealthy at all, since defining wealthy is impossible. The fact is, the government needs money, and it has to come from somewhere.
And there may be a more elegant solution: creating new tax brackets to separate the super-rich from the merely affluent.
In an insightful column in the New York Times Magazine, David Leonhardt explains that while the top tax rate used to be much higher than today’s top rate, it only applied to the super-rich. In 1960, the top rate was 91%, but it applied to the those making $400,000 a year — equivalent to $3 million in today’s dollars when adjusted for inflation. A couple making $20,000 (or $140,000 in today’s dollars) would pay 38%.
Franklin D. Roosevelt’s brackets had been even more extreme. His top rate of 79% applied to those making $5 million a year, or about $75 million today. “As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller (above),” Mr. Leonhardt writes.
Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.
In other words, there should be a tax rate for Upper Richistan and one for Lower Richistan.
Of course, conservatives and some moderates argue that if we created a new bracket for the super-rich, they would simply move their money out of income and into lower-tax assets, like stocks or private businesses. So the net result would be less money for the government and less job creation and investment by the rich. (An op-ed by Mark Altieri in the Cleveland Plain Dealer over the weekend suggests that whenever Washington raises tax rates on the rich, revenues go down.)
Still, making a distinction between the haves and have-mores seems worth considering — if only for the entertainment of watching the pundits try to mount a populist defense against a tax on those making $3 million a year.