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CEOs and Two-Income Professional Couples Shouldn't Pay the Same Tax Rate

David Callahan

As everyone knows, the "fiscal cliff" deal raised taxes on households making over $400,000, restoring the Clinton-era top income tax rate to 39.5 percent.

One fact that gets less attention, though, is that progressivity in the tax code ends right there: There is no difference in the tax rate paid by a two-income professional couple bringing in $400,000 and a CEO who brings in the average pay for such executives, which was $14 million in 2011.

That doesn't make much sense. Which is why the Fairness in Taxation Act, proposed by Representative Jan Schakowsky, is a great piece of legislation. The proposal, which is part of the latest budget from the Congressional Progressive Caucus, proposes a new set of tax brackets for the nation's highest earners: 

  • $1-10 million: 45%
  • $10-20 million: 46%
  • $20-100 million: 47%
  • $100 million to $1 billion: 48%
  • $1 billion and over: 49%

Now, conservative commentators are going wild about how extreme this proposal is. Yet, as it happens, these brackets look very similar to those signed into law by Ronald Reagan as part of his 1981 tax breaks. In fact, Schakowsky's bill is quite generous to upper income Americans compared to what Reagan embraced. Under the 1981 law, the top bracket -- of 50 percent -- kicked in at $85,600 for married couples. 

In other words, the Congressional Progressive Caucus is actually to the right of Ronald Reagan when it comes to income tax rates. That shows you just how much the debate on taxes has shifted in recent decades. And that shift has happened at the same time that the top 1 percent has done phenomenally well thanks to structural changes in the economy -- with their incomes nearly tripling since 1979. 

One way to think about a big ramp up of taxes on the rich is that, in retrospect, the lower rates on wealthier Americans have simply been unaffordable, which helps account for today's big deficits. During the early postwar decades, the top tax rate was 70 percent and things were pretty good: The United States didn't run big deficits, it did invest heavily in areas like infrastructure and education, and the economy grew at a strong clip. The top 1 percent did plenty well during this period, too. 

I'm not one to idealize the 1980s, but it's worth noting that "morning in America" wasn't held back by a top tax rate of 50 percent.

In any case, back to the basic issue of fairness: There is no reason why the progressivity of the tax code should end at $400,000. In a place like New York City, that kind of money doesn't make you rich, just upper middle class, and folks at this level don't have much in common with George Soros. So why should they be paying the same tax rate?

They shouldn't be.