In Tax Cut Plan, Debate Over the Definition of Rich
Tax brackets at the upper end of the income scale were not always drawn so broadly. In 1970, when someone earning $37,000 had the buying power of a $200,000 income today, there were 25 income brackets. The taxpayer with $37,000 was taxed at the middle of the scale — 13 of the brackets charged higher rates to those with higher income.
Congress reduced the number of brackets in the 1980s in an effort to make the tax code simpler and to cut down on the abuse of shelters and deductions.
In the last 30 years, however, the percentage of total income earned by the top 1 percent of Americans has grown sharply — to 23.5 percent in 2007, from about 9 percent in 1979. And the income share of the top 0.1 percent has grown even faster — to 6 percent in 2007 from 2 percent in 1988.
Mr. Obama has used those income gains to argue that his plan is fair; at a town hall meeting last week, the president noted that 85 percent of the cost of extending the upper-income tax cuts would go to benefit “millionaires and billionaires.”
But it is unclear what, if anything, Congress will do to address the issue. Republicans uniformly oppose letting any of the tax cuts expire. Democrats have vowed to pass Mr. Obama’s plan after the elections. Given that they are likely to lose seats — and possibly control of one or both houses of Congress — it is uncertain whether they will follow through, compromise or simply extend all the cuts for a limited period.
Eric J. Toder, an economist at the Tax Policy Center, said that while the overall tax system was progressive now, there was historical precedent for creating new brackets to address a shift in income to the very highest end of the scale.
“The reason they fiddle around with the rate schedules and new brackets is to fine-tune,” he said. “The economic question is, What economic effects do you get in terms of sheltering income and how would it affect investment? But politics, not economics, will determine the outcome.”