Monday, October 29, 2007


I've been bemused by Rangel's tax proposal. Apparently, the 24/7 news networks must have promised campaign contributions if he could arrange to keep the election close. Thoughts from Greg Mankiw here and here.

I guess I don't have much problem with a 40% top marginal rate starting somewhere between $250K and $500K, but 42.1% (37.5% when the Bush tax cut expires + 4.6% for the new high bracket) seems a bit much. An alternative would be to keep the AMT, but just do away with state tax deductions as a preference item, leaving mortgage interest deductions and various depletions and depreciations around. Also, I guess I wouldn't be completely averse to treating portions of the lower rates for capital gains and dividends as preference items.

Some jiggery-pokery along these lines is probably in order. However, this misses the main point. The government is in a position to coerce a huge amount of money out of the taxpayers with little economic impact. (In other words, the growth of government has substantially lagged the growth of the economy, and there's money sloshing around that won't be missed--much.) The problem is that we really, really want government to grow slowly. Sudden infusions of cash make legislators stupider than they usually are. So I'd love to come up with something that's revenue-neutral and less redistributive than Rangel's plan. Of course, that's not what Rangel wants. He's looking for the ever-popular "revenue enhancement."


Len Burman said...

A couple of clarifications:

The top rate after 2010 will be 39.6 percent, not 37.5.

The AMT already disallows state and local tax deductions. Repealing the state and local tax deduction from the regular income tax and eliminating the AMT is roughly revenue neutral (and highly progressive) and would not require any tax rate increase.

The Rangel bill is revenue neutral, not a revenue enhancement.

TheRadicalModerate said...


Is that top rate income tax + medicare, or just income tax? (I was only including income tax, just to keep apples with apples.)

I'm looking at a 2006 AMT Form 6251 right now, and state, local, and property tax deductions are in fact a preference item, subject to AMT. Indeed, these items, along with mortgage interest deductions (which are also preference items) are why AMT has been causing middle class taxpayers to get hit with alt-min.

Did something change for 2007?

I agree that the stated goal of the Rangel bill is revenue-neutrality. I don't believe that that's his real goal. His real goal is to derive a significant increase in tax receipts as bracket-creep drives more and more people into the higher marginal rates. If that weren't his goal, he would have set the two higher brackets at much highers adjusted gross incomes. $200K is a lot of money, but it's well within the range of a two skilled earners, even two non-professional skilled earners. In 2005, 15.73% of US households made over $100K, with 3.17% making between 150-200K. A lot of those people will be captured by bracket-creep in the next few years, forcing them to join the 2.67% that already make over $200K.

Len Burman said...

39.6 percent is the top income tax rate (not including medicare tax) after 2010, as it was before 2001. I think a 37.5 percent rate might have applied in one year while the Bush Tax Cuts were being phased in.

You're right that the state and local tax deduction is the single biggest preference item under the AMT. Note, however, that most mortgage interest deductions are allowed under the AMT. The preference item (disallowed under the AMT) is interest on any mortgage or home equity line used to pay for something other than purchase, construction, or improvement of a home. This is a relatively small item.

The other big preference items are personal exemptions, allowed under the regular income tax but not the AMT, and miscellaneous itemized deductions. Together with the state and local tax deduction, those three constitute more than 90 percent of AMT preferences. See

As for bracket creep, I'm pretty sure that the thresholds for the surtax rates are indexed for inflation so bracket-creep, in its original sense is not an issue.

If the goal is really to raise an enormous amount of revenue, the best thing would be to let the AMT take full effect. AMT brackets are not indexed for inflation, which is one reason why so many upper middle class people are now at risk.