"Don't Tread On Me" Will Soon Make A Surprising Comeback, And From Unexpected Quarters

Megan McArdle:

I confess, I am surprised to find out just how little money you can raise by slapping a 5.4% surtax on incomes above a million. I also wonder at what point serious political resistance to taxes sets in. I know, it's common to claim that Americans are tax haters. But actually, Americans, even the wealthy, pay their taxes at a rate that would shock an Italian. We grumble, but in the end, we pay.

But at some point, that changes. In the highest paying zip codes, the effective average combined tax rate (not the marginal rate) on many affluent people is already well over forty percent--I shelled out more than 40% of my really non-lavish journalist's salary when I lived in Manhattan. The repeal of the Bush tax cuts will push some taxpayers into the 50+percent total tax bracket. Is America ready?

One thing I think that wonks often overrate is how fiercely the resistance to taxes mounts once you get past a certain point. Our mental arithmetic is all wrong. We think of a 5% tax increase as a relatively small amount. But of course, once you're nearing a 50% average tax rate, a 5% tax increase is something like a 10% cut in the taxpayer's take-home pay. And the higher the starting tax rate, the larger the percentage of tangible income the tax increase consumes. Yet because wonks assess tax increases relative to the size of the base rate, an increase from 55% to 60% actually sounds smaller than an increase from 15% to 20%. Yet from the perspective of the taxpayer, the former represents a much greater encroachment on their disposable income.

Someone with two million a year in adjusted gross income now takes home $650,000 out of the last million, then pays some portion of the remainder to various state and local authorities. In 2011, if all goes as currently planned, they'll lose just more than $100,000 of that income, and more to various tax increases on lower income levels. Rich people are less budget-conscious than you and I, but I bet even they notice a missing $100,000.

Should we feel sorry for them? No. But I expect they'll start felling sorry for themselves. And I'll be interested to see what impact this bill has, if it passes, on Obama's support among the wealthy.