Needed: A New Set of Income Tax Brackets

This article originally appeared in the Huffington Post on February 25, 2016.

By Philip Kotler

Hillary Clinton's stated recently that she will not raise taxes on the middle class. She will raise taxes only on the rich and super rich.

But at what income does the middle class end and the rich begin? Hillary defined the rich as starting with incomes over $250,000. Bryce Covert, in an article, claimed that the middle class ends at $206,568. Why? Because this is the income that defines the start of the top 5% of income earners. The top 5% is the rich class whose incomes grew substantially during this period. The middle and working class had falling real incomes since 1973.

Let's add that by 2012, the average income tax rate of the 400 wealthiest taxpayers fell to 16.7 percent. Advisors to wealthy families found creative ways to use tax shelters and tax loopholes. But why should wealthy families pay a lower tax rate than middle-class families?

Add that rich families spend millions on lobbyists to get Congress to pass legislation favorable to the rich. The Koch brothers are preparing to spend $900 million to help their preferred presidential candidates win the 2016 election.

I would like to propose that we consider setting the rich class as beginning at an annual income of $200,000. We will acknowledge that earning $200,000 a year in smaller cities or rural areas is a rich class income while in New York City or San Francisco is a middle-class income. But we need some number to start with.

The real question is how to distribute the tax burden between the rich and very rich. This calls for setting up a set of rising brackets where the marginal tax rate rises in each bracket. For example, the brackets and marginal tax rates can be:

Brackets, Marginal tax rate
$200,000-$500,000, 40% 
$500,000-$1,000,000, 42%
$1,000,000-$5,000,000, 44%
$5,000,000-$10,000,000 , 46%
Over $10,000,000, 50%

It should be observed that brackets were commonly used under the Eisenhower administration and subsequently but were finally squeezed down by the Republicans to one bracket with the limit at 39.5%.

My figures represent a progressive income tax system that calls the rich to pay taxes at a rising rate. Since Ronald Reagan, the Republicans have been cutting taxes on the rich to where only one rate applies, namely 39.6% no matter how rich they are. This has resulted in a redistribution tax system that has transferred money from the poor to the rich.

I would add another tax feature: let persons with outstanding college loans cut their tax payment by some percentage (say 50%) of their outstanding college loan. As they repay their college loan, they move toward paying the full required income tax on their income.

Other taxes than the income tax need to be increased as well if we are to reduce the annual federal deficit and continue our welfare programs including Social Security and Medicare. Capital gains and carried interest should be taxed at the normal income rate, not the lower rates in existence. I would add two other tax programs to consider: (1) a tax on financial trading transactions to raise revenue and reduce the growing volume of speculative transactions in the equity market. (2) a tax on high-value luxury goods.

Conservatives will raise the following objections:

1. The government is practicing class warfare and this will change the economic behavior of the rich, leading them to work less hard, invest less and in many cases leave the country. (But the rich did not object when redistribution went from the workers to the rich.)

2. The rich will increase their drive to replace labor with capital and this will seriously reduce the number of jobs. (There is little that can stop the continuing advances in technology).

The proposed progressive tax system is further justified to meet the growing consensus that income inequality keeps getting worse. Even rich citizens are beginning to press for some compression of the growing income gap between the poor, the working class, the middle class, the rich and the super rich.

The spirit behind this taxation system is captured in the remark of Oliver Wendell Holmes, Jr., "I like to pay taxes. With them, I buy civilization."

- Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Northwestern University Kellogg School of Management in Chicago.