Strange Incentives

23 November 2012

The NY Times reports from the budget negotiations that Washington is considering keeping the top marginal rates at 35 percent, but for higher-income folks making that rate apply to all income, just not the marginal dollar earned:

Seeking Ways to Raise Taxes but Leave Tax Rate As Is

This strikes me as pure sophistry.  And it would seem that it also sets up perverse incentives for some range of income, essentially shifting a family’s budget constraint down at the margin where the 35 percent rate applies to all income rather than just on the marginal dollar.

Tax revenue needs to be raised.  Some combination of eliminating certain deductions and changing the marginal rate on those earning over a particular threshold would seem to be the way to do so without creating perverse disincentives.   Treating investment income as regular income would also seem to be a way to level the playing field a bit.

But it would be nice if Congress would at least try being honest with what they’re doing rather than relying on some trick to say they didn’t raise taxes when in fact they did.

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One Response to “Strange Incentives”

  1. Scott Todd Says:

    Your idea for intellectual honesty might work if the majority of members of congress hadn’t signed a pledge saying they would never ever raise taxes, on penalty of being wiped out in their next primary race by the Norquistians.


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