What would be a sensible top marginal income tax rate? It was 28% (kind of) when Ronald Reagan left the White House. After rising to 40% under George Bush and Bill Clinton, it fell back to 35% under George W. Bush’s 2001 tax cuts (now reversed). Mitt Romney’s across-the-board tax cut plan would have pegged it at 28%. Finally, Paul Ryan’s Path to Prosperity set the top rate at 25% — and that seems more or less to be where Washington Republicans are right now.
Ramesh Ponnuru, in his (excellent) call for a post-Reagan economic agenda, says the following:
A Republican Party attentive to today’s problems rather than yesterday’s would work to lighten the burden of the payroll tax, not just the income tax. An expanded child tax credit that offset the burden of both taxes would be the kind of broad-based middle-class tax relief that Reagan delivered. Republicans should make room for this idea in their budgets, even if it means giving up on the idea of a 25 percent top tax rate.
Bloomberg’s Josh Barro, a tax expert, thinks for the fiscal math to work, conservatives and Republicans need to accept a top rate of around 40%. Reihan Salam counters that advocates of the expanded child tax credit, including Ponnuru and economist Bob Stein, probably aren’t too far from that view.
Certainly the politics don’t seem to be there right now for a one-third cut in top tax rates. Moreover, if forced I would guess the revenue-maximization inflection point of the Laffer Curve is considerably above 25% in the US today. Of course, the Laffer Curve only addresses short-term economic impacts. Given those the optimal revenue-maximizing rate is likely considerably below the laughable 70% (or higher) level some liberal economists advocate. (The version of the progressive consumption tax that I like, produced by AEI’s Alan Viard, has a top rate of 35%.)
At its current level, the top marginal rate isn’t a pressing problem compared to a) high corporate tax rates, b) high (and rising) investment taxes, and c) a tax code that should be much friendlier to parents. That’s where GOPers should spend their political capital. I also agree with this suggestion from Reihan:
I’ve been suggesting that Republicans ought to counter the president’s call for eliminating various tax expenditures to increase tax revenues beyond the levels reached under ATRA, AKA the fiscal cliff deal, by suggesting that we apply the revenue from the elimination of tax expenditures to an expanded child credit that could be used to offset payroll taxes, a la the Stein plan. This would leave the top rate under ATRA untouched while shifting the terms of the tax debate to friendlier terrain. Granted, this isn’t a consensus view among Republicans, but I think realism demands that conservatives recognize that for now at least, the political case for reducing the top marginal tax rate is relatively weak.