Oh … That Sneaky Republican Tax Reform

Last year I posted an 11 part series on the tax reform passed by the Republicans. I thought I had covered all the important parts. Not so.

“Democratic socialists”, led by Alexandria Ocasio-Cortez want to raise the marginal tax rate on high incomes to 70%. I’m not sure they have an economic motivation for this, it may simply be resentment.

Surprise, surprise … the Republicans already did this.

Actually, they did worse: the Republicans did raise the effective tax rate, Democrats are merely proposing to increase the marginal rate.

Here’s what the Republicans did: they instituted a new form double taxation of corporate officer incomes.

N.B. Double taxation means the same thing is taxed once, and then taxed again. It occurs all over (and some have argued that incomes in the U.S. are taxed up to 5 times).

After the tax reform, income paid to executives must be taken out of the corporate income statement below taxes (with after-tax profits) rather than above them (with costs). And then they’re taxed again at the personal income tax rate.

To be concrete, paying a corporate officer of a publicly traded New York company an extra $1 million will result in an additional $261,350 in federal and state corporate taxes, $370,000 in federal individual income tax, $38,000 in payroll tax, and $127,000 in New York State and New York City tax.

Since the $261,350 part would come out first, the corporation would actually be paying $1,261,350 and then subtracting the $261,350, on which an additional $535,000 in taxes would be paid. That works out to an effective marginal rate of 63% (i.e., 796,350/1,261,350).

Read the whole thing. This is from the Brookings Institution, which is not known for being sympathetic to Republicans (and which probably qualifies as part of Trump’s “swamp"). It’s entitled “Ocasio-Cortez wants to raise the tax rate on high earners. The Tax Cuts and Jobs Act already did”.

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Of course, AOC isn’t proposing this. She wants something even worse: to raise the marginal federal personal income tax rate on incomes this high from 37% to 70%. In the above calculation, that would mean an 89% effective marginal rate for the corporate officer..

It’s cynical, but all of this makes me think that “Democratic socialists” just say things they think will play well in the legacy media, without actually thinking about them very deeply. And then people repeat them loudly.This can be difficult to parse out: if 70% is proposed, but they’re already paying 63%, is 89% what you really want, and if not, what is??