Tax Analysts Blog

Bannon’s 44 Percent Rate Would Undo Decades of Republican Policy

Posted on Aug 1, 2017

After failing spectacularly on healthcare reform, the Trump administration and Republicans in Congress will now turn their attention to taxes. President Trump is stumping for a tax cut as the signature achievement of his first term. But forces inside the White House have a different idea in mind. Chief Strategist Steve Bannon is reportedly pushing for a 44 percent top tax rate on incomes over $5 million. 

Bannon sees a high tax rate on the wealthy as the centerpiece of populist tax reform. It would deliver on Trump’s promise to legislate on behalf of the working class, and it would raise funds needed to lower other tax rates (although we don’t know what Bannon’s thinking is on those other rates). Bannon’s position on the top rate is at odds with previous proposals from Trump (which all called for a 35 percent top rate) and, not surprisingly, congressional Republicans. However, it is similar to a proposal from Trump’s former opponent. In the 2016 campaign, Hillary Clinton called for a 4 percent surcharge on incomes over $5 million, which she said would raise about $15 billion a year. 

Although the leaks from Bannon generated quite a bit of news late last week (at least in tax circles), it’s pretty clear that the chief strategist is basically on his own. House Speaker Paul Ryan said that a 44 percent rate wouldn’t be part of the Republican plan. And the president has never said anything about it. Even if Trump did push for it, it’s highly unlikely that conservative Republicans in the House and Senate would ever vote for a tax package that raised rates. If they did, it would reverse decades of progress in a GOP-led quest for lower and lower marginal tax rates.

In 1980 Ronald Reagan swept to power calling for major tax cuts.  At the time, the highest marginal rate was an eye-popping 70 percent. Reagan’s tax cuts in 1981 lowered that rate to 50 percent. But he wasn’t done. The 1986 reform act pushed the rate down to 38.5 percent in 1987 and then to 28 percent by 1988. President George H.W. Bush was forced to accept a small tax increase as part of his 1991 deficit compromise, which set the rate at 31 percent. That’s the last time a Republican president backed a higher marginal tax rate, and it was done very reluctantly (and probably cost him reelection in 1992). 

When Republicans were in complete control of government in 2001, they passed major tax cuts that lowered the rate from 39.6 percent to 35 percent. President Obama’s victory in 2012 led to the American Taxpayer Relief Act, which increased the rate back to 39.6 percent, and all Republican tax plans of significance since then have called for a rate of 35 percent or even lower. 

Much like Hillary Clinton’s surcharge, Bannon’s 44 percent top rate is an attempt to exploit popular discontent over income inequality. Bannon sees it as a form of populism. But like Clinton, he’s missing the point. Increasing the tax rate on super-high incomes would do little to curb tax system inequality – that would require targeting the capital gains preference, something few politicians other than Sen. Bernie Sanders ever really talk about. 

Bannon’s 44 percent rate would represent a historic shift in tax priorities for the Republican Party. And that’s why it almost certainly will receive almost no support from GOP lawmakers. It’s unlikely to even pick up the backing of Bannon’s boss. And it wouldn’t do much of anything to solve income inequality or even raise much revenue to pay for other priorities (such as infrastructure or lower tax rates for the middle class). 

Read Comments (1)

Mike55Aug 3, 2017

Great article. I'd not underestimate Bannon though. While I don't see Republicans increasing the top marginal rate either, but as recently as 18 months ago I dismissed growing Republican anti-trade sentiment as a fringe position. I was dramatically wrong then (whereas Bannon got it right), so perhaps I'm wrong now too.

Your comment about the relative income inequality effect of a top marginal rate increase vs. cap gains preference reform falls outside the mainstream.* Most Democrats believe the apex of the Laffer curve occurs at a rate in the high 20s for cap gains, and mid 40s for ordinary income. Combine this with the fact that measured U.S. income inequality is driven primarily by households making under $5M -- generating income primarily taxed at ordinary rates -- and it's easy to see why the top marginal rate gets all the attention from mainstream Democrats (and Bannon).

*"Outside the mainstream" should of course not be read to imply "wrong." No one is completely certain how all this stuff works, least of all me. The point is simply that the approach Bannon (and Hillary) advocate is not "missing the point," they just have a different understanding of how various features of the tax code effect income inequality. And their view happens to be the more conventional one, for whatever miniscule bit of value that's worth.

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