For Tax Purposes, ‘the Rich’ Are People Who Earn More Than You Do

(Bloomberg Opinion) -- When it comes to taxation, “the rich” keep getting richer. In the U.S., even politicians who want to raise taxes feel obliged to shield the middle class from tax increases — and the definition of the middle class keeps expanding to include higher earners.

Tax rates on income have risen four times over the last 30 years in the U.S.

In 1990, at the insistence of the Democrats who controlled Congress, President George H. W. Bush raised taxes on married couples making more than $82,000 a year and singles making more than $50,000. (That’s $157,000 and $94,000 in today’s dollars.)

In 1993, President Bill Clinton and a Democratic Congress raised taxes on couples making more than $140,000 ($243,000 today) and singles making more than $115,000 ($200,000).

In 2010, President Barack Obama and a Democratic Congress raised taxes by 0.9 percent on income above $250,000 for couples and $200,000 for singles as part of the Affordable Care Act. The tax started to be levied in 2013.

Also in 2013, tax cuts enacted in the George W. Bush administration expired for couples making more than $450,000 and singles making more than $400,000. President Barack Obama agreed with House Republicans to protect the middle class by making the tax cuts for lower earners permanent.

This history is part of the context for the recent suggestion by Democratic Representative Alexandria Ocasio-Cortez that various progressive priorities could be partially financed by enacting a 70 percent tax rate on income above $10 million. Most of the debate since she made the remark has focused on the first number — on whether 70 percent is too high.

But the second number, the threshold at which the rate would hit, also tells us something about the state of the politics of taxation. To be sure, neither Ocasio-Cortez nor her defenders have ruled out tax increases on people making less than $10 million. But even on the left wing of the Democratic Party, the tax increase that comes quickest to mind and tongue is one that hits the super-wealthy.

To get some perspective on how affluent a slice of America we are talking about, consider that a household making $250,000, and thus hit by the Affordable Care Act tax increase, is doing better than 95 percent of households. To have been hit by the expiration of the Bush tax cuts, a household would have had to be in the highest-earning 1 percent.

The upward creep of acceptable thresholds for a tax increase almost certainly reflects the changing class base of the Democratic Party. The party has become more and more hospitable to high earners, suburbanites and people with college degrees. It made some of its biggest gains in the last election among these people.

They usually consider themselves middle class, or perhaps upper middle class; and if they favor higher taxes on “the rich,” they typically have in mind people making significantly more than they do.

In this new Democratic coalition, raising taxes on couples making more than $300,000 is not a sure-fire applause line. Fixating on the top 1 percent, or the top 0.1 percent, is safer.

As the break point between the middle class and the rich for the purpose of tax politics keeps drifting higher, the amount of revenue that tax increases can generate is subject to tighter and tighter limits.

Conservatives may therefore be tempted to cheer this trend. But it also works against conservative preferences on tax policy. Supply-siders believe that whatever level of revenue the government seeks to raise, it should get with the lowest possible top tax rate. That’s because raising the top tax rate has an especially negative effect on the incentive to work, save and invest.

A supply-sider who agreed that the federal government needed more revenue as a proportion of national income would first want to scale back or eliminate tax breaks.

A second-best policy would be to lower the threshold for the top tax rate — for example, making today’s top rate (37 percent) kick in at $400,000 instead of $612,000 for couples. Either option would increase taxes on high earners.

Households making more than $1 million a year would pay a higher tax bill, because more of their income would be taxed at the top rate. But they would not pay a higher marginal rate, so their incentive to produce would be unchanged.

The political difficulty with either kind of tax policy is that they would hit our expansively defined middle class. If progressives win big in the 2020 elections and go for tax increases thereafter, they may not take Ocasio-Cortez’s comments as a guide. But they will certainly follow her example in targeting a tiny percentage of Americans in order to raise a relatively small amount of revenue.

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.

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