Nancy Pelosi set a clever political trap for Republicans last week, and House Speaker John Boehner stepped right into it. The House Minority Leader proposed a vote on preserving the Bush tax cuts for everyone making less than $1 million per year, rather than letting them expire on households making $250,00 or more per year, as President Obama wants to do. Boehner rejected it.
By offering a compromise so far to the right of the president and having Boehner still say no, Pelosi succeeded at her true goal, which was exposing Republican extremism. The $1-million-per-year threshold, which was previously advocated by leading Democrats such as Sen. Chuck Schumer (D-N.Y.), is so high—remember, these aren't just people who have more than $1 million in total wealth, they're people who bring in a million per year—that only the most ideologically rigid right-wingers would oppose the notion of asking those above it to pay a little more in taxes to help reduce the deficit and protect entitlement programs.
But let's be clear: On the policy merits, this is a lousy proposal. And if we're going to treat those making over $1 million per year differently, there's a better way to do it.
According to Congress' Joint Committee on Taxation, Pelosi's offer would raise $366 billion over 10 years—44% less than Obama's proposal. And even that plan would only add an estimated $829 billion over 10 years. Letting the Bush tax cuts expire for everyone, by contrast, would bring in $3.6 trillion over the same period. In other words, with the deficit at $1.1 trillion for 2012 alone, Democrats were already settling for too little revenue with Obama's original position, and Pelosi's would compound the damage.
At a bare minimum, the idea that people making between $250,000 and $999,999—all of whom are among the richest 2 percent of Americans—can't afford to go to back to paying Clinton-era tax rates is absurd. Conservatives argue that returning to those rates for the wealthiest would impede growth, but it certainly didn't have that effect during the 1990s. And polls show the public overwhelmingly supports the idea.
But Pelosi's proposal does contain one important insight: There's a real difference between, say, a couple of college professors making a combined $260,000 per year, and an investment banker or corporate law-firm partner pulling in over $1 million. The latter group can afford to contribute more than the former, and the tax code should indeed treat them differently.
That's why the right policy would be to let the Bush tax cuts expire on everyone making more than $250,000 per year—and to add a higher tax bracket for the 0.1 percent of American households earning $1 million per year or more.
Families earning between $250,000 and $999,999 per year would go back to paying their Clinton-era rate of 39.6 percent, and everyone making more than $1 million per year would pay a higher rate, perhaps around 45 percent.
That would bring us closer to the norm in other developed countries, and our own history. As Catherine Rampell of The New York Times observed last year, we have often had far more than the six income tax brackets we currently use. "Tax brackets were much more incremental in 1975," notes Rampell. "Go back to 1918, and you’ll find even more finely grained tax brackets." (In 1975 there were 21 brackets; in 1918 there were 56.) During the 30 years of stable economic growth that followed World War Two, there were far more than today.
The highest rate has often been much higher than it is now. As Timothy Noah has written in Slate in making the case for more tax brackets at the top, between 1944 and 1963, it was 90 percent. Under President Kennedy, it dropped to 70 percent, where it stayed until 1982. That doesn't mean we necessarily want to return to a 90 percent top rate, but it puts in perspective the claim that a top rate of over 35 percent is tantamount to socialism.
This move toward a flatter tax code has coincided with—and helped drive—our growing inequality problem. "Since 1979, the share of national income going to the top 0.1 percent (people making more than about $1 million in current dollars) has essentially quadrupled, from about 2 percent to about 8 percent," Noah wrote.
And combined federal, state, and local taxes are significantly lower in the U.S. than in other developed countries. Noah noted that a 2008 survey (pdf) of member countries by the Organization for Economic Cooperation and Development "ranked the U.S. two notches from the bottom." Other sharp economic policy analysts, including James Surowiecki, Matthew Yglesias, Kevin Drum and Annie Lowrey have likewise argued for more tax brackets at the top.
Pelosi is right that there's a big difference between the merely wealthy and the super-rich. But if we really want to solve our long-term deficit problem without decimating social programs, the answer is to return to a system in which that latter group—which has made out so well over the last few decades—makes the kind of contribution that it did for most of the 20th century.
Ben Adler is a contributing writer for The Nation and federal policy correspondent for Next American City.