Extend the Bush Tax Cuts Below $1 Million? I'm Intrigued...

by Noam Scheiber | November 19, 2010

[Guest post by Noam Scheiber:]

The idea's been bouncing around for a while, but Politico suggests some Senate Dems are now seriously considering it, even if many of their colleagues aren't wild about it:

Senate Democrats struggled Thursday to figure out what that next step would be. At a three-hour caucus meeting, members stood up one-by-one to speak their mind, engaging in what one senator described as an animated debate over raising the income threshold to $1 million or keep it at $250,000.
“A lot of people want to really make a good run at continuing the middle class tax cuts and raising taxes on the wealthy and see where we are,” said Sen. Joe Lieberman (I-Conn.), adding that he was open to the idea. ...

The political argument in favor is that it makes the messaging squeaky clean, and life even less comfortable for GOP opponents--Republicans want to block middle-class tax cuts to take care of millionaires! Obviously you have to weigh that against the fact that the political calculus already heavily favors Democrats (as Jon keeps pointing out, public opinion strongly supports middle-class tax cuts and strongly opposes tax cuts for the top 2 percent). And the fact that the revenue loss from raising the threshold from $250,000 to $1 million would be significant--a major substantive disadvantage.

Having said that, I think there's another big advantage to pursuing this, which lies at the nexus of politics and substance: You create a healthy precedent for separating the tax treatment of millionaires from the tax treatment of everyone else, effectively creating a millionaires tax bracket, which is something that really should happen. James Surowiecki elaborated on the argument in this excellent New Yorker column back in August: 

Even within the top one per cent, income is getting more concentrated: the top 0.1 per cent of earners have seen their share of national income triple over the same period. All by themselves, they now earn as much as the bottom hundred and twenty million people. So at the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.
The current debate over taxes takes none of this into account. At the moment, we have a system of tax brackets well suited to nineteenth-century New Zealand. Our system sets the top bracket at three hundred and seventy-five thousand dollars, with a tax rate of thirty-five per cent. (People in the second-highest bracket, starting at a hundred and seventy-two thousand dollars for individuals, pay thirty-three per cent.) This means that someone making two hundred thousand dollars a year and someone making two hundred million dollars a year pay at similar tax rates. LeBron James and LeBron James’s dentist: same difference. 
This makes no sense—there’s a yawning chasm between the professional and the plutocratic classes, and the tax system should reflect that. A better tax system would have more brackets, so that the super-rich pay higher rates. (The most obvious bracket to add would be a higher rate at a million dollars a year, but there’s no reason to stop there.) This would make the system fairer, since it would reflect the real stratification among high-income earners. A few extra brackets at the top could also bring in tens of billions of dollars in additional revenue.

And, of course, once you have a separate millionaires tax bracket, it's politically easier to raise taxes for millionaires later on if necessary. And probably easier to create additional brackets beyond that--$10 million, $100 million--which are probably also a good idea. As Suriowiecki puts it: 

The explosion in wealth at the very top of the pyramid has given rise to what the commentator Matt Miller has called a “lower upper class”—doctors, lawyers, accountants, even some journalists, who make very good livings but enjoy nothing like the rewards that come to their peers in finance or in the executive suite. The lower upper class exerts a cultural influence out of proportion to its size, and so its anger toward the upper upper class—toward outrageous executive salaries and Wall Street shenanigans—could be a powerful force for reforming the way we deal with inequality.

Hear, hear.

Source URL: http://www.newrepublic.com//blog/jonathan-chait/79307/extend-the-bush-tax-cuts-below-1-million-makes-some-sense