When is a tax increase not a tax increase? When we harken back to the Reagan era and introduce a 'bubble' bracket. The NY Times describes a plan that makes Democrats happy by rasing taxes on "the rich" (as measured by income, not wealth) and placates Republicans by leaving the top bracket untouched.
The simple dodge - phase out all the lower tax brakets as income rises above some threshold. That raises the effective tax rate (and the true marginal rate) without changing the top statutory rate.
But aides involved in the negotiations said they remained confident, in part because many of the ideas that could break the impasse were fleshed out during successive but fruitless deficit negotiations between the president and Mr. Boehner and between Vice President Joseph R. Biden Jr. and Representative Eric Cantor of Virginia, the House majority leader, and during the deliberations of the Congressional “supercommittee” on deficit reduction formed during the 2011 impasse over raising the nation’s borrowing limit. One Republican aide involved in the current talks said both sides believe a deal can be reached before Christmas.
The supercommittee drafted a proposal that would have eliminated tax brackets lower than 35 percent for affluent families, taxing the first dollar of taxable earnings at the highest tax bracket. In the late 1980s, the tax code included a similar rule, which “clawed back” savings from lower tax rates for some rich families.
Under the existing tax code, the first $17,400 of adjusted gross income for a couple filing jointly is taxed at 10 percent. Above that level, up to $70,700, income is taxed at 15 percent. Income between $70,701 and $142,700 is taxed at 25 percent. Gross incomes up to $217,450 are taxed at 28 percent. The next bracket, 33 percent, ends at $388,350 for couples. The top bracket hits adjusted gross incomes only above $388,350.
All taxpayers get the advantage of the lower tax rates below the top threshold, whether they earn $40,000 or $40 million.
Taking those tax brackets as Gospel, and relying on Excel and Keurig, I infer that if the effective average rate on income of $435,800 is 35%, the marginal rate from $388,350 to 435,600 must be 100%. Ouch. If all the phase-outs are spread out from $388,350 to $1,000,000 then the marginal rate over that bracket is 40%. In that scenario, everyone with income over $1 million will have an average rate of 35%; all income over $1 million will be taxes at a marginal rate of 35%.
Back in the Reagan era, we had a bubble bracket where the maximum statutory rate was 28% but the effetive marginal rate at a lower income level was 33%, due to the phase-out of deductions.
If that 5% spread guides current thinking, the transitional phase-outs will end at $1 million. How much revenue that raises I have no idea.
And the politics of this intermediate high bracket are ludicrous for the Republicans. Obama wants to raise the top marginal rate on everyone above some threshold to 39.6% (Let's round that to 40% for purposes of this mini-tirade). The Republican counter will be to raise the top marginal rate to 40% on incomes from $400K to $1 million and then cut the rate back to 35%? That may protect large small-business owners, but only by throwing the smaller successful ones overboard.That makes no sense even if small businesses really are imperiled by higher taxes, which is a dubious claim if we can rely on this Treasury study (summarized by the lefty CBPP).
I will add that this bubble-headed thinking inspired the subsequent tax reforms of the early 90's - once the Republicans accepted the top marginal bracket if 33%, refusing to extend that to incomes above the phase-out level became politically untenable. Read Bush's lips.