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Unflattening Taxes on the Rich

As Congress prepares for a big debate on the fate of the Bush tax cuts, there's an internal debate breaking out in progressive circles on how to deal with tax rates on the very wealthy, not just those currently in the top income tax bracket.

This debate-within-the-debate is being driven by two external data points: First, the fact that income inequality in the United States during the last two (or arguably, the last four) decades has especially manifested itself in the concentration of wealth at the very top of the income ladder; and second, the fact that higher taxes for "millionaires" consistently polls well.

James Suroweicki explains the first point nicely in a recent column in The New Yorker:

Between 2002 and 2007...the bottom ninety-nine per cent of incomes grew 1.3 per cent a year in real terms--while the incomes of the top one per cent grew ten per cent a year. That one per cent accounted for two-thirds of all income growth in those years. People in the ninety-fifth to the ninety-ninth percentiles of income have represented a fairly constant share of the national income for twenty-five years now. But in that period the top one per cent has seen its share of national income double; in 2007, it captured twenty-three per cent of the nation's total income. 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.

Thus, framing the tax progressivity question as mainly involving rates for those with incomes well below super-rich levels misses the mark, and, as both Surowiecki and (for months now) Jonathan Chait have pointed out, misses a political opportunity associated with a widespread popular conviction that the very wealthy don't pay their fair share of taxes.

In terms of the stakes involved in proposing something like a "millionaire's tax" (essentially a new and higher top rate on very high incomes), Nate Silver has shown at FiveThirtyEight that it could indeed raise some pretty serious federal revenues.

But the political bonus of a "millionaire's tax" proposal goes beyond the numbers: it would help expose the really dramatic gap between the two parties on the whole concept of progressive taxation.

After all, even as Democrats debate making federal income taxes more progressive, a growing and increasingly dominant segment of Republicans favor "flattening" tax rates to eliminate progressivity, exempting capital and corporate income from taxation, and/or shifting taxation away from income altogether and focusing it on consumption. And even for those Republicans who don't embrace radical tax proposals, the "thinking" behind them is the rationale for the vague support for high-end or business tax cuts that's almost universal in today's GOP, in growing contradiction with conservative demands for debt-and-deficit reduction.

Anything that makes this contrast more vivid, on terms supported by big majorities of the American public, is a pretty good idea for Democrats. So I'd strongly recommend that in the debate over extending or eliminating Bush's tax cuts for the top bracket, proposals to crate a new bracket for the "super-rich" ought to become an essential ingredient.