White House chief strategist Steve Bannon has a big idea that, according to Axios, he's been pushing aggressively within the Trump administration: raising the top income tax rate. He's reportedly telling his colleagues that the top bracket should "have a 4 in front of it." (The current top bracket is 39.6 percent, or 43.4 after you include Medicare taxes.)
This would be a big shift for the administration. Its latest tax plan would cut the top rate on non-investment income to 35 percent, or 37.9 percent including Medicare taxes. Earlier plans featured top rates of 33 percent and 25 percent, and would lower the rate for “pass-through” income that owners of certain businesses get from 39.6 percent to a mere 15 percent, inducing a huge amount of tax evasion and cutting average rates for the rich still further.
And while Bannon has always affected a rivalry with wealthy elites, which this latest proposal fits into well, it’s doubtful that the more traditional supply-side conservatives on Trump’s economic team, namely Treasury Secretary Steve Mnuchin and National Economic Council Chair Gary Cohn, will get on board.
But they should. Trump and his team have a tremendous number of goals for tax reform. They want a dramatically lower corporate tax rate (Axios reports that Mnuchin and Cohn “aren't bluffing when they say they want to slash the corporate tax rate to 15% from the current 35%”) and to let companies deduct all their investments immediately, instead of over time. They want a much bigger standard deduction on the individual side, and some kind of subsidy for child care.
Those are expensive changes, which require substantial pay-fors. One of the biggest that Republicans have proposed is the hugely controversial border adjustment measure, which Walmart, the Koch brothers, and other influential business lobbies are loudly opposing. Another is ending the deductibility of interest for debt, a very worthwhile proposal that is sure to enrage banks that take out massive amounts of debt; Goldman Sachs veteran Mnuchin has said he opposes this shift. On the individual side, eliminating the state and local tax deduction, as the Trump team has proposed, would raise money and reduce a big giveaway to rich people in blue states, but then again, the category “rich people in blue states” includes a lot of GOP donors as well as Trump himself.
And even if all of those controversial changes made it through, they might not be enough to pay for all the cuts that Republicans want.
Giving up on individual income tax rate cuts, and embracing higher rates for top earners, would free up a lot more money for corporate tax cuts. The Congressional Budget Office estimates that raising the brackets for people making more than $400,000 or so by 1 point each would raise about $93 billion over 10 years. For a new top rate of, say, 47 percent, that could mean as much as $650 billion over 10 years, and even more if you’re willing to hit 50 percent or raise taxes on people making under $400,000. Another option would be to do what Hillary Clinton proposed in the campaign and add a 5 percent surcharge to income above a certain threshold, without any deductions allowed; that would further reduce opportunities for tax evasion.
An even more ambitious plan, proposed by economists Alan Viard and Eric Toder and embraced by Sen. Mike Lee (R-UT), would overhaul the way the US taxes investment income. Today profits are taxed through the corporate tax code, and then again when they’re distributed to investors through dividends, or when those investors sell shares for a capital gain. Viard and Toder propose lowering the corporate rate to 15 percent and then taxing investments every year at normal income tax rates, whether or not they’re sold. That would end preferential treatment for investment income in the individual code, and let the individual tax raise quite a bit more money. It would enable a 45 or 47 percent top bracket to raise even more revenue to offset the cost of full expensing and a bigger standard deduction.
Ultimately, the Trump administration has to make a decision about what its goal in tax reform is. If the goal is to cut corporate taxes and encourage investment by companies, then Bannon is right: Top income rates should go up to pay for that. If the goal is to just funnel money to rich people, then they shouldn’t. But the former is a more defensible goal, and a top income rate of 45 or 47 percent would help get us there.