Should We Raise Tax Rates on the Rich?

James Surowiecki today has a piece on why we need more tax brackets for the super-rich.  After all, is it fair that a professional making $375,000 pays the same as LeBron James?

There are a couple of things to consider here.  First, there's an element of special pleading in these articles, which appear fairly regularly from the coastal financial journalism community.  As I noted last year, when David Leonhardt had a similar column:

I also note, just as an aside, that the definition of "very rich" seems increasingly to be set at "just above the level a top-notch journalist in a two-earner couple could be expected to pull down".

There's always someone who is living better than you, but we can't have a special tax rate for all of them.  LeBron James could complain, truthfully, that Larry Ellison gets to have a harrier, and he can't afford one.  Does this mean he should get a discount on his taxes?  There's some level of consumption beyond which relative disparities just do not invite much sympathy.

And is $375,000 above that?  It depends on who you are.  If you're a journalist in a two income couple that makes $300,000 and still has to give up vacations in order to pay school tuition, it hardly seems fair that LeBron James and you are in the same tax bracket--not while you're living in less than 2000 square feet.  But if you're someone who has to give up vacations in order to pay the dentist and the electric bill, this probably seems eminently fair.  Anywhere in the country, you can live very well on $375,000.  Even in New York, if you look at living within the city limits as a luxury that costs a huge chunk of your salary, rather than as one of life's basic necessities.

The second--and I think the most important--point to make is that while LeBron James' marginal tax rate is the same as someone making $375,001 worth of AGI, his effective tax rate is much higher, since he pays the highest rate on much more of his income.  The latter pays 35% on $1 of his income.  James will pay it on most of his salary.

The other question is, isn't there some upper limit on tax brackets for the wealthy?  When the Bush tax cuts expire, that top rate will go to 39.5%.  Then there's the 2.9% Medicare tax, and the 0.9% Medicare surtax we just enacted.  There are, for those living in places like New York, New Jersey, California, or DC, state and local income taxes that can add an extra 5-10% onto the tax bills.  We're now well over 50% marginal rates before we've even considered things like  property and sales taxes.

When more of your extra dollars are going to the government than yourself, I think it's a problem, even if you're very rich.  I think that has to be factored into any argument about the "fairness" of the tax system.

Now, I think you can justly complain that for many wealthy people, effective tax rates are artificially low, because they structure their income to avoid taxes.  But that's not an argument for higher marginal rates; it's an argument for tax simplification, a project I absolutely agree with.  In fact, I . . . AHEM . . . happen to have a proposal for it right here