The House Democrats want to mitigate the impact of the alternative minimum tax on taxpayers with incomes of less than $250,000 by dramatically raising tax rates on entrepreneurs and investors. As the Wall Street Journal explains, the proposal would boost the top tax rate by 4.3 percentage points. But the plan conveniently neglects to extend the Bush tax cuts, and the editorial calculates that this will push to top rate to about 44 percent. And since the AMT will still exist for the so-called rich, marginal tax rates could reach 80 percent or more (and pity the entrepreneurs and investors who live in high-tax states such as California and New York). The proposal is a good recipe for making America less competitive. As fiscal policy, though, it is a disaster:
Tax rates are falling all over the globe – even in Sweden. The exception is the U.S. Congress, which is scrambling to find some way, any way, to raise them. Last week, Democrats on the House Ways and Means Committee released a draft of their tax plan that would raise the highest income tax rate by 4.3 percentage points to 39.3% immediately. And because the proposal doesn’t extend the Bush tax cuts, the highest income tax rate would rise to the neighborhood of 44% after 2010. This would lift the top federal income tax rate higher than it was even under Bill Clinton. And get this: For families with incomes between $250,000 and $500,000, the “marginal” tax rate paid on the next dollar of earned income could soar to 80%, or in some cases even above 100%. Why? Because when income rises above $250,000, some taxpayers would be kicked into the Alternative Minimum Tax – which means that they lose tens of thousands of dollars of write-offs for state and local tax deductions, marriage penalty relief, certain child credits, and so on. The value of the lost deductions can exceed the value of the extra income earned. So some Americans could pay more than $1 in taxes for every $1 they earn under the House tax plan. …The wealthiest 1% of Americans already pay more than one of every three income tax dollars into the Treasury. Under the Ways and Means proposal, the share of all income taxes paid by the top 1% would rise to nearly 40%. The top 2% would pay roughly as much as the bottom 98% of all taxpayers. …A 44% top marginal rate would reduce U.S. competitiveness by reducing the after-tax return on investment. Less investment means fewer jobs and lower wages.