Zeev's Turnips Talk Politics (ZTTP)

[DewDiligence]

100% Marginal Tax Rate

http://online.wsj.com/article/SB118178001856834655.html

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June 14, 2007

Tax rates are falling all over the globe -- even in Sweden. The exception is the U.S. Congress, which is scrambling to find some way, any way, to raise them.

Last week, Democrats on the House Ways and Means Committee released a draft of their tax plan that would raise the highest income tax rate by 4.3 percentage points to 39.3% immediately. And because the proposal doesn't extend the Bush tax cuts, the highest income tax rate would rise to the neighborhood of 44% after 2010. This would lift the top federal income tax rate higher than it was even under Bill Clinton.

And get this: For families with incomes between $250,000 and $500,000, the "marginal" tax rate paid on the next dollar of earned income could soar to 80%, or in some cases even above 100%. Why? Because when income rises above $250,000, some taxpayers would be kicked into the Alternative Minimum Tax -- which means that they lose tens of thousands of dollars of write-offs for state and local tax deductions, marriage penalty relief, certain child credits, and so on. The value of the lost deductions can exceed the value of the extra income earned. So some Americans could pay more than $1 in taxes for every $1 they earn under the House tax plan.

The point of this revenue grab is to pay for making families with earnings under $250,000 a year exempt from the Alternative Minimum Tax (AMT). Without legislation this year, the number of Americans who pay the AMT will rise as much as six-fold to 23 million. Even those with incomes as low as $60,000 could pay the AMT in some high-tax states. Maryland's Chris Van Hollen, chairman of the Democratic Congressional Campaign Committee, has said his party risks a tax revolt in 2008 without some kind of AMT patch.

So Democrats are proposing to raise taxes on three million Americans in order to exempt 20 million from the AMT. The wealthiest 1% of Americans already pay more than one of every three income tax dollars into the Treasury. Under the Ways and Means proposal, the share of all income taxes paid by the top 1% would rise to nearly 40%. The top 2% would pay roughly as much as the bottom 98% of all taxpayers. Ways and Means Chairman Charlie Rangel of New York seems to think this qualifies as tax fairness.

There is rough justice in watching Democrats squirm to fix the AMT monster they created in 1969 to punish 21 millionaires who legally escaped taxes at the time. And if Democrats want to do away with the AMT, we're all for it. One sensible idea from Senator Arlen Specter of Pennsylvania would repeal the 1993 Clinton AMT tax hike, which raised the rates to 26% and 28% from the single rate of 24%. Mr. Specter's bill would relieve 10 million middle class tax filers from AMT tyranny.

But Democrats don't want to cut taxes; they want all of that extra revenue to spend. So instead they'd raise the top federal tax rate to its highest level in a quarter-century. A 44% top marginal rate would reduce U.S. competitiveness by reducing the after-tax return on investment. Less investment means fewer jobs and lower wages. A Tax Foundation analysis of tax returns finds that roughly three in every five Americans in the highest income tax bracket are small business owners, who create most new jobs.

What's missing from this Congressional tax debate is any recognition that today's tax rates are producing record tax receipts. If the current pace of tax collections continues amid a modicum of spending restraint, the federal budget could be balanced within 18 months. The tax share of GDP is approaching 19%, which is above its modern historical average. It's a sorry day when American politicians have to be instructed in the virtues of low tax rates by the Swedes.
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