WASHINGTON -- Congressional negotiators, trying to avert a fiscal crisis in January, are examining ideas that would allow effective tax rates to rise for the wealthy without technically raising the top tax rate of 35 percent. They hope that the proposals will advance negotiations by allowing both parties to claim that they stood their ground.
One possible change would tax the entire salary earned by those making more than a certain level -- $400,000 or so -- at the top rate of 35 percent, rather than allowing them to pay lower rates before they reached the target, as is the standard formula. That plan would allow Republicans to say they did not back down in their opposition to raising marginal tax rates, and Democrats to say they prevailed by increasing effective tax rates on the rich. At the same time, it would provide an initial effort to reduce the deficit, which the negotiators call a down payment, as congressional tax-writing committees hash out a broad tax code overhaul.
That idea could be combined with reinstatement of tax code provisions that once prevented the rich from taking personal exemptions or itemizing deductions. Those rules were eliminated by the 2001 tax cut. Reinstating them would tack an additional 1 to 2 percentage points onto the effective tax rates of high-income households without raising the 35 percent rate, but which households would be effected has not been decided.
In all, tax experts say, top tax bracket families would find their effective rate jumping to 41 percent, though the top statutory rate would remain at 35 percent.
The proposals have been floated as a way to speed negotiations to avert a crisis in January, when the tax cuts passed under President George W. Bush expire and across-the-board spending cuts on military and domestic programs automatically kick in. This "fiscal cliff" would squeeze hundreds of billions of dollars out of the fragile economy next year and, many economists say, send the nation back into recession.
President Barack Obama met a week ago with House Speaker John A. Boehner, R-Ohio; House Minority Leader Nancy Pelosi, D-Calif.; Senate Majority Leader Harry Reid, D-Nev.; and Senate Minority Leader Mitch McConnell, R-Ky., and both sides emerged confident that a deal could be struck. Since then, progress has slowed considerably.
If Republicans insist that the top 35 percent rate cannot change while Congress tries to rewrite the tax code, negotiators could decide to technically keep all the Bush-era tax rates in place but eliminate the lower tax rates for rich households.
"Would you consider that a tax rate increase?" asked one aide familiar with the idea. "It would not impact the top marginal rate, and no one would have an effective rate over 35 percent." But, he added, taxes would rise for the rich. He, like other aides, spoke on condition of anonymity because congressional leaders want negotiations to be kept quiet.
A Democrat familiar with the proposal called it plausible, but said its future would depend on an official scoring of how much revenue it would raise. White House and congressional aides "are looking at lots of creative options," the Democrat said.