A 70 Percent Tax Rate Would In Some Ways Favor the Rich

A 70 percent income tax rate on the wealthy would damage the economy. As in the past, this rate would likely end up applying only to a fraction of top earners’ income. Top economists have shown that this kind of tax rate nevertheless would discourage work, innovation, investment, and business expansion, create incentives to use the most economically inefficient tax shelters, and reduce economic growth and raise unemployment.

But there also would be unintended, under the radar negative consequences. One would tilt an already upside-down welfare program even more in favor of the rich.

A welfare program that favors the wealthy may sound like a progressive’s worst nightmare. It isn’t. It instead is part of the employee benefits iron rice bowl, created decades ago to avoid high tax rates, that hides in plain sight on most pay stubs.

Consider the tax code’s exemption for most health insurance premiums and medical care expenses paid by employers for their employees. If, for example, an employer pays $10,000 for employee’s health insurance premiums instead of paying the employee $10,000 more in wages, the employee pays no federal income or payroll taxes on this sum.

At first glance, it may appear that this exemption equally benefits all taxpayers. But our progressive income tax system, with rates currently ranging from zero percent to 37 percent, instead already gives wealthy taxpayers up to five times higher savings. If employers pay $10,000 for health insurance premiums for a couple with a combined income of $24,000, the couple avoids $765 of federal taxes. But if employers pay $10,000 for health insurance premiums for a couple with a combined income after deductions of over $600,000, the couple avoids $3,935 of federal taxes.

A 70 percent income tax rate would almost double this gap. It would increase the benefit to the richest taxpayers to $7,235 –almost ten times the benefit received by low-income taxpayers.

Companies already often use this exemption to further compensate executives and other very high earners with particularly generous (and tax-free) health insurance and medical care benefits. When companies increase the premiums paid for their employees, the employees increase their tax savings.

A 70 percent tax rate would dramatically increase rich folks’ and their companies’ already strong incentive to wastefully funnel as much pay as lawmakers can be induced to permit into these kinds of tax-exempt conduits to minimize the fraction of income subject to the 70 percent rate.

And beyond tax-exempt forms of compensation, the tax code also has other provisions that would further disproportionately favor the wealthiest if the top rate is raised to 70 percent. The mortgage interest deduction, the charitable contributions deduction, and the exemption for 529 educational account earnings all similarly would tilt much more in their favor with a 70 percent rate.

The damage that the proposed 70 percent income tax rate would inflict on the economy makes it a non-starter. Its unintended consequences, including tilting an already upside-down welfare program even more in favor of rich, would add insult to injury.