Ever get tired of hearing some rich Republican talk about how he/she pays a 35% Federal income tax rate, all the while knowing that in reality, the tax rate they pay is likely more close to 20%?
There is a remedy to this. Phase out the lower tax brackets and tax expenditures for upper income households in a systematic fashion and the actual tax rates would look much lower, the investment income would be easier to tax as ordinary income, and the tax rates listed would be much closer to the actual tax rates paid.
I will use, for simplicity's sake, the tax rates of the 1990's achieved by Bill Clinton and Newt Gingrich. The top tax rate was 39.6% and capital gains(originally) were taxed at 28%. However, the effective tax rate for the top 1%(those making more than roughly $400,000) was, even in it's highest year, only 24.2%. So, effectively, the top tax rate could well have been 24% to achieve the same result. This is how it might work.
From 0-$70,000 would be taxed exactly as it was, at a 15% rate. All exemptions, credits and deductions would remain.
The tax rates from $70,000-$250,000 would be consolidated into a single tax rate. While these tax rates in the 1990's were 25%, 28%, and 31%, the single tax rate to achieve the same effective tax rate would only need to be 20%.
Incomes over $250,000, which were mostly taxed at the 39.6% marginal tax rate would only require being taxed at a rate of roughly 24%.
The bottom 15% tax bracket would be taxed as it was to achieve the same results. However, as the income progressed from $70,000-$250,000 the bottom tax rate along with exemptions, credits and deductions would be phased out. When income was 1/3 of the way between $70,000 and $250,000(which would be $130,000), 1/3 of the income below $70,000 would be taxed at the 20% rate and 1/3 of the exemptions, credits and deductions would be phased out. When income was 2/3 of the way between $70,000 and $250,000(which would be $190,000), 2/3 of the income below $70,000 would be taxed at the 20% rate with 2/3 of the exemptions, credits and deductions phased out. When income reached $250,000, all income below $70,000 as well as the income between $70,000 and $250,000 would be taxed at a 20% rate, with all exemptions, credits and deductions phased out, achieving the effective tax rate during the 1990's.
An individual making over $250,000 would have all income below $250,000 taxed at 20% and income above $250,000 taxed at 24%. The bottom 20% tax rate for these earners would be phased out between $250,000 and $500,000 in a similar fashion Thus, an individual making $500,000 would have all income taxed at 24%, achieving the highest effective tax rate of the top 1% during the 1990's.
So, a tax code as progressive as taxes during the 1990's is achieved with rates of 15%, 20% and 24%. The tax rates that Obama is currently advocating has a bottom rate of 10% and a top rate of 39.6%, making it much easier for Republicans to argue that the rich are overtaxed while the lower incomes are not paying taxes.
If a tax plan such as this were proposed, Republicans would be forced to explain why a 24% income tax rate for millionaires and billionaires is too high. Investment income could very easily be taxed as ordinary income. Lastly, notice the room on top of this tax code for additional tax brackets for earners with even higher incomes.
The tax code we currently have is skewing the debate in a way that makes it very difficult to win a more progressive system of taxation with higher effective rates and revenues from the higher incomes earners. In tax reform, liberals should seek as much efficiency and the lowest listed tax rates possible for high income earners to achieve a given revenue objective and a lower tax burden with the highest listed tax rates possible for low income earners.
This is done by offering all tax expenditures to low income individuals(the ones who actually may need them) while phasing out tax expenditures and lower income tax rates for higher income individuals. If this were accomplished, the debate over who is taxed to much or too little changes in a way that lends itself to winning a truly more progressive system of taxation.
UPDATE: I debated sourcing this but didn't and, judging by a few of the comments below, I guess I should. The numbers I used concerning the effective tax rates of the various incomes come from the bipartisan Tax Policy Center.
I did not differentiate the different tax rates paid on earned and unearned income, as this is not the point. Neither is it the point to address the AMT. I understand that many high income individuals pay a far higher rate than 24%, but my point was that 24.2% was the highest effective income tax rate on the top 1% during the 1990's, and to show how a system of taxation could produce the same effective tax rates and revenue production on the various income levels while accurately reflecting the true tax rates paid, thus skewing the debate in a way to make achieving a more progressive system of taxation more possible.
The historical effective tax rates can be found here:
http://www.taxpolicycenter.org/...
The year I used was 2000, in which the highest rates Clinton achieved were 19.7 for the top 10%, 21.6 for the top 5%, and 24.2 for the top 1%. I have done these calculations before(with graphs, etc...) but estimated a bit this time, so the results may be very slightly off.