Tuesday, December 7, 2010

Taxing Only the Extremely Rich

Yesterday I suggested that something like the Schumer compromise might be the way to go for the GOP on the tax cuts. Today, of course, it was announced that a deal was reached where nothing changes for two more years in exchange for a pretty big Christmas tree of other spending, but we can always hope that the Democrats feel like committing political suicide and don't pass it.

But it got me to wondering: How much revenue do you lose if you create a top marginal rate well above the $250K limit that Obama had proposed? To answer this, it's time to hit the IRS data, from which I produced this breakdown of total declared adjusted gross income for 2007:

(Note that I used 2007 as a more representative year than 2008 because 2008 was really, really bad.)

A few things of note here:
  • The mode--the category with the highest total declared AGI--is the $100K-$200K category.
  • If you were to set the top rate bracket to start at $200K, you'd get 33% of all revenue subject to whatever you set the top marginal rate to. Presumably, you'd get a little less than that at $250K.
  • If you were to move the top bracket up to $1M, you'd get about half of that--16% of all revenue, and there's only a little difference between that and $1.5M, where you'd get 14% of all revenue.
Seems to me that the sweet spot might be at $1.5M. Is that enough money to avoid an impact on small businessmen? I don't know, but I suspect that it is. Remember, the operative theory here is that small businessmen who make more than they need to run their households won't lean out their businesses in the face of a higher tax rate. In other words, there's an "I don't give a crap" threshold.

I didn't do the analysis on how much of this is dividend income. I still maintain that that sort of passive income could be taxed with few consequences.

The Democrats would have been much better off trading a top bracket above $1.5M, taxed at, say, 41%, for a permanent extension for everybody else. Let's see what becomes of the deal.

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