A few thoughts on the House Democrats’ still-evolving plan to pay for close to half of health reform by raising marginal rates on the highest earning taxpayers:

*By allowing the Bush tax cuts to expire, restoring the phase-outs of the personal exemption (PEP) and itemized deductions (Pease), and now by proposing a ‘surcharge” of 2 percent or more, Democrats would be boosting the top individual tax rate from the Bush-era 35 percent to nearly 45 percent, ever-closer to the 50 percent top rate of 1985.

*Top-bracket rate hikes would continue the troubling trend of adding loopholes and raising rates—what my former TPC colleague Gene Steuerle likes to call tax deform.

*By adding as many as 3 new brackets, we’d be up to 9 and closing in on the pre-1986 days of 14. It’s a long way from the 2 (really 3) of the Tax Reform Act.

 *Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.

*It will be almost impossible for Obama to cut the corporate tax rate as he has promised. Because it is easy for many partnerships, self-employed professionals, and others to change the legal form of their businesses to take advantage of the lowest tax rates, a top individual rate of 45 percent and a corporate rate of 25 percent or even 30 percent are probably untenable.   

*Raising the top rates to pay for health reform would make President Obama's fiscal math approximately impossible. We’d have a top rate of nearly 45 percent, a promise never to raise taxes for those making less than $250,000 annually, little or no government revenue from a cap-and-trade system that gives away rather than auctions pollution credits, and trillion dollar deficits as far as the eye can see. Do you think anyone is sitting around the White House asking, “Does anybody know what the hell we are going to do next?”

*These rate hikes would take the income tax one more big step towards its breaking point. One day soon, we are going to have to seriously rethink a tax code that can no longer finance our demands.

*Why is asking just a few million people to pay for health reform a good thing?