Even If GOP Raises Tax Rates on Rich (!), It Would Only Be Beginning of Reform

To begin with, the proposals they’re pondering would not be considered radical coming from any other source.

By William Rice

After decades of single-mindedly pushing tax cuts for the rich, and often getting them, Republicans recently shocked the political world by floating the idea of raising taxes on the wealthy. The reason for this big departure from party orthodoxy is that the GOP needs money to pay for all the tax cuts and spending increases Donald Trump has promised. There are also factions of the party who think a tax hike on the rich would burnish its working-class credentials. And the advocacy of groups like Americans for Tax Fairness played an important role as well.

Republicans don’t have a lot of options besides raising some taxes on the rich to pay for their massive tax giveaway to billionaires and big corporations. Even after targeting Medicaid and food assistance with over a trillion dollars in cuts–and with more proposed service reductions on the way– Republicans would still be responsible for a huge escalation in public debt unless they find revenue to offset Trump’s budget-busting agenda. 

To be sure, many knowledgeable observers doubt the GOP could take a step so contrary to the party’s central identity as increasing taxes on the well-off. President Trump and House Speaker Mike Johnson have dampened expectations. But even if Republicans do follow through on their out-of-the-box idea, no one should be lulled into thinking the fight for fairer taxes has been won. 

To begin with, the proposals they’re pondering would not be considered radical coming from any other source. 

One plan would allow the top tax rate–the rate paid on the highest part of the highest-income taxpayers–to rise from 37% to 39.6%. The word “allowed” is used here because that’s what under current law it’s already scheduled to do at the end of this year. The 37% tax bracket is one of the parts of the 2017 Trump-GOP tax law that’s set to expire on December 31, automatically returning the top rate to what it was before the law, or 39.6%. Republicans generally want to make all the cuts permanent–but now might exclude the top tax rate from that rescue mission. 

Only the highest-income households ever pay the top rate, and even for them it’s only on the part of their income that exceeds a lofty threshold: this year, over three-quarters of a million dollars per couple. (The amount rises each year with inflation.) 

A similar proposal under review would create a new 40% tax rate on income over $1 million. 

According to one estimate, allowing the top tax rate to revert to 39.6% and lowering the income over which that rate is paid to $450,000 per couple would raise more than $500 billion in revenue over 10 years. Since neither GOP plan under consideration would lower the bracket threshold, the revenue raised would presumably be less. But it would still be a lot of money. 

Yet the GOP proposal would fall well short of ensuring the super-rich and big corporations pay their fair share of taxes. And the very wealthiest individuals–prominently including billionaires–would be impacted very slightly and in many cases, not at all. 

That’s because of how they make their money and how the tax code treats investment income versus wages–that is, how it privileges wealth over work. 

The new top tax bracket–whether 39.6% or the nearly identical 40%, and whether it starts at $750,000 or $1 million–would apply only to so-called “ordinary” income. For most of us, that means wages(though it also includes interest, rent and some other items) and it's nearly the only source of income most of us have. 

What it doesn’t include are the two most prevalent forms of investment income for the rich: long-term capital gains and qualified dividends. A capital gain is the increase in the price of an asset over its purchase price, and long-term in this context means such winning investments that are sold after being held for at least a year. Dividends are regular payments to corporate shareholders, and the “qualified” part distinguishes them from dividends that are really more like interest, such as a money-market account pays. 

Both of these forms of passive income–which are overwhelmingly received by the wealthy–are taxed under a different rate system that tops out at 20%. (A surtax is added at higher income levels that’s equal to the payroll tax paid on wages of similar size.) So no matter how high you move the top ordinary-income rate, the rate on the investment income of the super-rich never budges. 

The people who would be most affected by higher rates on ordinary income are successful professionals–doctors, lawyers, entertainers–who, despite their hefty incomes and whatever you think of their professions, at least work for a living. Around one-third of billionaires worldwide inherited their money, and that share will grow with the passing of the current generation.  

The only way to make sure the super-wealthy–including the 19 families that got a trillion dollars richer last year–pay a fair share of tax is to reform how we tax investment income. That means narrowing or eliminating the investment-income tax discount, at least for the highest incomes; annually taxing the handful of richest households on the capital gains in assets they do not sell; and reviving the moribund estate tax, which is all that stands between us and an even greater consolidation of oligarchic wealth.  

It still seems unlikely Republicans will abandon their reflexive anti-tax brand built up over half a century. But if they do wind up raising rates on the highest incomes, it’s important to note that it would be a lonely progressive tax change in a GOP fiscal agenda still heavily favoring the rich, including the lowered corporate tax rate from 35% to 21% from the 2017 bill that is permanent, extending the expiring parts of the Trump tax law, restoring corporate loopholes and abolishing the estate tax. Even with a tax increase on millionaires, the Trump tax bill will give trillions of dollars in tax cuts to the very wealthy and large corporations.