Feel free to add me to the ranks of those who love the tax proposal from the Center for American Progress. The plan has plenty of things for liberals to like including restoring progressivity to the tax code and closing many of the pesky loopholes that allow wealthy people to evade taxation….

UPDATE : Whoops, I completly screwed this one up. Within minutes of posting, I’ve had two different people write in to tell me that tax brackets don’t work at all like the way I’ve assumed. That pretty much makes this entire post moot. My apologies to the Center for American Progress. For those interested in reading my now-flawed analysis, I’ll include it for posterity in the extended text.

UPDATE 2 : To make matters worse, as a lark I did a chart comparing a gradually increasing tax rate with the correct tax revenues for CAP’s proposal. Needless to say, my formula would be a pretty shitty deal for almost everybody.

Feel free to add me to the ranks of those who love the tax proposal from the Center for American Progress. The plan has plenty of things for liberals to like including restoring progressivity to the tax code and closing many of the pesky loopholes that allow wealthy people to evade taxation, but I really don’t like this idea intended to simplify the tax structure :

Reduce the Number of Income Tax Brackets. In addition to taxing each source of income equally, we would cut the number of income tax brackets in half, establishing a simpler, more progressive three-rate structure with rates at 15 percent, 25 percent, and 39.6 percent. The three tax rates would apply to brackets of taxable income of $0 to $25,000; $25,001 to $120,000; and $120,001 and above. These brackets would be indexed for inflation. The standard deduction would be raised slightly to $10,000 for a married couple and also indexed for inflation.

I know most people hate math and all, but I guarantee you that they hate getting screwed by the IRS even more.

Maybe it’s just me, but I’ve always hated the idea of tax brackets. No, I’m not coming out in favor of a flat tax, it just doesn’t make sense to me that in this era of personal computers and pocket calculators that we’re still using a tax table. While reducing the number of tax brackets may look nice on paper, I guarantee CAP’s three bracket system doesn’t look so great to someone who makes $25,001. In fact, it hurts pretty much everyone in the $25-28K income range.

Imagine for a moment that you’re working a low-pay job that pays roughly $24K per year. Having a hard time making ends meet, you welcome the opportunity to work some overtime during the holiday season. Unfortunately, you do a little too well and end up taking home $25,500 at the end of the year. At this point, you’re doubly screwed. Not only are you in a higher income tax bracket now, but your new tax bracket applies to everything you made over the previous year. Since your employer was only pulling aside the requisite 15% throughout the year, that means you owe an extra 10%. Somehow I doubt our hypothetical worker has an extra $2500 laying around to give to the IRS.¹

That’s why a slightly increasing tax rate makes so much more sense. Using the tax rates from the CAP study, if the tax rate gradually moves up when the income falls between the minimum and maximums specified, our hypothetical worker’s tax rate jumps from 15% to 15.129%. For the geeks out there, the formula for calculating this new tax rate is as follows :

((worker’s income – min. inc.) / (max. inc. / min. inc.)) * (max. tax rate – min. rate) + min. rate

…or when plugging in the numbers from the CAP survey :

((income – 25000) / 95000) * 24.6 + 15

While the second formula may still look a little complicated for the layman, keep in mind that there are ways to hold taxpayers hands through this process (eg. “take the number in column 2 and divide it by 95000″). Not to mention the fact that it would be incredibly easy to set up a simple tax calculator at the irs.gov or a tax help 800-number.

With the formula above, the middle class taxpayers start paying more than CAP’s 25% at about $65K. Since a graduated tax system probably wouldn’t be revenue neutral (at least, in comparison with CAP’s three-bracket system), that would give economists room to adjust the variables a bit. Could the minimum income be higher or the minimum rate be lower?

I know that the perceived complications of an ill-defined tax rate make something like this a hard sell, but the answer certainly isn’t to “simplify” the system to the point that the “punishing people for being successful” argument makes itself. Ultimately, a system like this would only prove to be an interim step between our current tax code and the flat tax that conservatives have been drooling over for decades. As proponents of progressive taxation, we should do everything in our power to ensure that the tax code reflects the idea that higher incomes should be taxed at higher rates, but chopping incomes into three disparate chunks just makes the problem of tax inequality worse.

^{1 : It gets worse with people at higher incomes. Someone making $120K will take home $90K after paying their 25% tax rate. If that same person made an extra dollar, they’d take home $72,481 with their new 39.6% rate. To put things another way, their extra dollar of income would make them owe the IRS an extra $17,519. Ouch.}