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More on a Millionaire’s Tax Bracket

At the National Review, Reihan Salam, all-around smartypants, voices the conservative response to my post proposing that Congress should create more tax brackets. He argues that a new tax bracket for the very rich would do three bad things and therefore is not worth creating: it would increase revenue volatility for the government; it would not raise much money; and “a more steeply progressive income tax increases the political risks posed by a dramatic expansion of social budgets.”

But Reihan’s objections only solidify my belief that more tax brackets — for the top one percent, or millionaires, or folks making $10 million and up a year — are a good thing.

First, let’s reiterate the central argument for new tax brackets: The rich have gotten richer. A lot richer. (For a really excellent examination of the United States’ income inequality problem, see Timothy Noah’s series at Slate.) Larry Mishel of the Economic Policy Institute explains the changes since 1979, a period some economists call the “Great Divergence”:

“[B]etween 1979 and the start of the current recession in 2007, the pre-tax incomes of the upper 1 percent grew 214 percent, while the incomes of the middle-fifth and lowest-fifth grew, respectively, 25 percent and 4 percent… [T]his extremely unbalanced growth implies that 38.7 percent of all of the income growth accrued to the upper 1 percent over the 1979-2007 period: a greater share than the 36.3 percent share received by the entire bottom 90 percent of the population.”

Indeed, income inequality increased through the 2000s — with the super-rich getting super-richer. This created what Matt Miller has elegantly described as a “lower upper class” — filled with doctors and lawyers and other professionals.

Part of the hesitancy with hiking taxes on the rich, I think, stems from the birth of this “lower upper class.” Americans do really want to soak the rich. But a household headed by a well-paid nurse and a police chief might make $250,000 a year, the income point at which President Obama wants to let taxes rise by letting the Bush tax cuts expire. My guess is that most Americans want to raise taxes on these guys, but not on that nurse and police chief, whose wealth seems reasonable and attainable.

Of course, the income tax is progressive: The rich bear a much greater burden than the poor. Reihan flags this finding from the Tax Foundation showing the phenomenon:

In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.

But let’s look more closely at those numbers. In 2004, the top 1 percent paid 39.6 percent of federal income taxes and made 19 percent of adjusted gross income (AGI). In 2007, that same top 1 percent paid 40.4 percent of federal income taxes and earned 22.8 percent of AGI. Another way to say that is: The top 1 percent’s share of AGI grew 20 percent, but at the same time the top 1 percent’s share of income taxes grew just 2.02 percent.

But Reihan looks at those numbers and sees something different: “This strikes me as fairly important. If the top 1 percent is responsible for 40.4 percent of revenue from federal individual income taxes, a new top rate will presumably increase revenue volatility, as income at the top of the distribution tends to fluctuate with the business cycle.”

Onto the case against creating a new bracket, then.

Reihan is right about this point. The wealthy earn a lot more income from sources like investments, commissions, bonuses and housing sales. Lower- and middle-income Americans make a much higher proportion of their income from wages and salaries. Therefore, income among the wealthy tends to be more volatile, and tends to change more dramatically with the economic tides. That means government revenue from an income tax becomes more volatile the more progressive it is.

But he is wrong about what it means. As we’ve learned through this recession, revenue volatility is a massive problem for states, since they cannot run budget deficits. It is less of a big deal for the federal government, which can run as big a deficit as it wants and as Congress authorizes. Over the next, say, five years, I doubt that additional volatility due to a more-progressive income tax would impact the federal government at all.

Reihan’s second point is that a more-progressive income tax, the kind I laid out, would not raise that much money. This is neither here nor there. It would raise billions of dollars. A dollar is a dollar. And at some point, the government needs to raise money from somewhere. Given the dramatic growth of income inequality, I would argue raising income taxes a bit on the very wealthy is a decent place to look. (Reihan also quotes Alan Viard arguing that increasing income taxes also increases the disincentives to earn. I don’t debate this, but also don’t see it as terribly relevant. The Laffer Curve bends somewhere, but not at 39.6 percent.)

Then, the third point. Reihan cites Monica Prasad’s The Politics of Free Markets, a “history of neoliberal reform efforts in the U.S., Britain, France, and West Germany.”

At the time of the oil crisis in the 1970s, American and British tax policies were more punitive to business and the wealthy than the tax policies of France and West Germany; American and British industrial policies were more adversarial to business in key domains; and while the British welfare state was the most redistributive of the four, the French welfare state was the least redistributive. Prasad shows that these adversarial structures in the United States and Britain created opportunities for politicians to find and mobilize dissatisfaction with the status quo, while the more progrowth policies of France and West Germany prevented politicians of the Right from anchoring neoliberalism in electoral dissatisfaction.

He concludes: “[A] more steeply progressive income tax increases the political risks posed by a dramatic expansion of social budgets. That is, the left-wing is inadvertently aiding the right-wing. Some will be amused by the cosmic justice of it all. I’m more concerned about deadweight loss.”

I appreciate his concern for the left, but still fail to see how this means we should keep the top income tax rate for the guys making billions the same as the top income tax for our nurse and police chief.

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