Recent reports suggest President Donald Trump would be open to raising marginal tax rates on the wealthy. Congressional Republicans should take his offer up: it’s good policy and good politics.
The top federal marginal tax rate is currently only 37%. That’s low by international standards: most developed countries have top marginal rates exceeding 45%.
It’s true that the top marginal rate, including state and local income taxes, exceeds 50% in high-tax places such as California and New York City. But that’s the fault of the progressive Democrats who run those places, not the federal government. Wealthy people in Republican-governed states often pay low or no state income taxes, putting their top marginal rate well below international norms.
Raising tax rates by between 1 and 2.6 points for the top three tax brackets would raise nearly half a trillion over 10 years, according to the Bipartisan Policy Institute. These tax increases would only apply to single filers with at least $201,000 in taxable income and joint filers with at least $402,000, people that most Americans would consider well off.
Changing the taxation of other provisions that disproportionately benefit the rich would raise tens of billions more. Wealthy households can avoid paying income taxes on mortgage interest, for example, or by donating their art collection to a local museum. The specific amounts raised by curtailing or eliminating these windfalls could be substantial, depending on the tax expenditures involved.
This is a good policy for two reasons. First, extending the 2017 Trump tax cuts for everyone else costs trillions of dollars. Hiking taxes on the rich helps to minimize that cost, thereby reducing the increase in the national debt.
It also helps pay for some of Trump’s proposed new tax cuts, such as eliminating income taxes on tips or overtime. With the annual deficit already over $1.5 trillion a year, it will be easier to provide tax relief to people who need it by raising taxes on people who don’t.
But perhaps the biggest reason to do this is political. Democrats are already saying the coming tax bill is simply a giveaway to billionaires. Why not take away their best economic argument by taking away the 2017 tax cuts for those people in the first place?
No one wants or should engage in class warfare, but the fact is that the very wealthy have gained enormously from the past forty years of economic globalization and low taxation. Trump’s constituency is tilted heavily toward people who have not gained nearly as much.
The voters who made Trump president and gave the GOP unified congressional control backed Democrats as recently as 2020. Those Hispanic voters whose new GOP support is touted by party leaders backed former President Bill Obama, former President Bill Clinton, and former President Joe Biden. They may like the new, Trump-led GOP, but they did not become supply-side conservatives.
Wealthy people will benefit from many other administration policies, such as the promised deregulation agenda. That boom in wealth generation could easily offset the after-tax effects of small increases in tax rates or the removal of tax preferences.
Some rich Republican donors won’t like this and could threaten to withhold political contributions in retaliation. But the party cannot be held hostage by a small number of people who would cut off their noses to spite their faces.
Can they really think they would be better off with Democrats back in charge? Raising taxes on the rich is a religion for them, and the sky’s the limit. Unified Democratic control of Washington could easily see more regulation of business, much higher tax rates on corporations and the rich, and a new tax on wealth that would really hurt billionaires.
AMY CONEY BARRETT IS NOT BEHOLDEN TO TRUMP
Trump, a billionaire himself, could go to these people and tell them that this small sacrifice is what they need to make to stave off the larger disaster.
The result of embracing small tax hikes of the well-to-do is clear: more money for low-income tax cuts, more deficit reduction, and political jujitsu on Democrats. Republicans should welcome the chance to be thrown in that briar patch and reap the rewards.
Henry Olsen is a senior fellow at the Ethics and Public Policy Center and a veteran political analyst. He hosts Beyond the Polls, a podcast about American elections and campaigns.
