Congress Is Thinking About A Sneaky New Scheme To Raise Taxes — And A Few Folks Could Get Seriously Hosed

Water hose

Photo: Flickr/Instant Vantage

The primary Fiscal Cliff challenge is this: Democrats insist on raising taxes on the rich. Republicans, who are terrified of Grover Norquist and primary challenges (and who generally hate tax hikes) refuse to do vote for tax hikes.So the question is: How can you raise taxes and not actually vote for a tax hike? One possibility is to just wait, and let taxes automatically rise for everyone, but then this would represent fully hitting the Fiscal Cliff, and the middle class gets dinged.

Jonathan Weisman at The New York Times reports on one plan that’s being considered: It would prevent the rich (defined, perhaps, as people making over $250,000) from taking advantage of the lower marginal tax rates on the lower parts of their income.

Weisman explains:

Under the existing tax code, the first $17,400 of adjusted gross income for a couple filing jointly is taxed at 10 per cent. Above that level, up to $70,700, income is taxed at 15 per cent. Income between $70,701 and $142,700 is taxed at 25 per cent. Gross incomes up to $217,450 are taxed at 28 per cent. The next bracket, 33 per cent, ends at $388,350 for couples. The top bracket hits adjusted gross incomes only above $388,350.

All taxpayers get the advantage of the lower tax rates below the top threshold, whether they earn $40,000 or $40 million.

If Republicans insist that the top 35 per cent rate cannot change while Congress tries to rewrite the tax code, negotiators could decide to technically keep all the Bush-era tax rates in place, but eliminate the lower tax rates for rich households.

On Twitter, Bloomberg View’s Josh Barro (an expert on taxation) and Nate Silver explained one huge problem with this idea. If the elimination of the lower tax rates kicked in at, say, $250K, then someone who makes $250K would have lower take home pay than someone who makes $249K (and gets to keep all the lower marginal rates). It would also mean a higher tax on the 250,000th dollar of earnings, than the 1 millionth. The beauty of the current tax system is that nobody ever gets less take home pay by making more money.

So if the tax code switches to just what’s described above, then it’s a horrible idea.

A solution to this is a “phase-in” schedule, so that someone making $250,000 doesn’t automatically lose all of the lower rates… just some of them. But even still you have a problem, as Josh explains, where a taxpayer’s highest marginal rate, in that certain phase-in band, jumps above the official marginal rate.

In short, anyone who makes just over the cap considered “rich” could get uniquely hosed.

The bottom line seems to be that finding a way to “raise taxes” while not raising taxes is worse than just agreeing on a new tax system that may have some tax hikes.

Read the whole report here >

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