A few days ago I wrote a post about rich people who didn’t understand how marginal tax rates worked, and therefore thought that under President Obama’s plan they’d suddenly face a big hike in their tax bill as soon as they passed Obama’s magic $250,000 threshold. Today I extend an abject apology to these people. That may not be how the tax code works now, but apparently it’s not crazy to think that negotiators in Washington are discussing exactly that:
One possible change would tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula….“Would you consider that a tax rate increase?” asked one aide familiar with the idea. “It would not impact the top marginal rate, and no one would have an effective rate over 35 percent.” But, he added, taxes would rise for the rich. He, like other aides, spoke on condition of anonymity because Congressional leaders want negotiations to be kept quiet.
A Democrat familiar with the proposal called it plausible, but said its future would depend on an official scoring of how much revenue it would raise. White House and Congressional aides “are looking at lots of creative options,” the Democrat said.
I’ll make several observations here. First, it’s crazy. Under this plan, when you crossed the magic threshold from $399,000 to $401,000, you’d suddenly owe about $30,000 in extra taxes. You really would have an incentive not to make more money if you were near that cutoff point. The dumb urban legend would become fact.
Second, it’s a gift for the super rich at the expense of the merely ordinarily rich. It would have a big effect on someone making $400,000, but only a tiny effect on someone making, say, $10 million a year, since their effective tax rate would stay at 35%, instead of going up to 39.6% for the vast bulk of their earned income. This implies that Republicans are willing to throw the ordinarily rich under the bus in order to save the super rich.
Third, the Times article suggests something similar was part of the tax code “in the late 1980s.” Really? I didn’t know that. But if that’s the case, I assume it didn’t last long because, you know, it’s crazy. Why would anyone think it’s a good idea to resurrect this brain-dead idea?