Kim Rueben is a senior fellow at the Tax Policy Center at the Urban Institute.
Updated February 4, 2015, 3:32 AM
Though the percentage of taxpayers that earn more than $200,000 a year is concentrated in less than 1 percent of American counties, these individuals can exert a disproportionate influence on policy, as shown by the president canceling his proposal to limit tax-preferred 529 college savings plans.
Where people live is a choice, especially for those earning above $200,000 a year. Higher salaries reflect higher costs, but also higher amenities.
The strong negative response to limiting 529s from the “merely affluent” probably comes the argument that, even though people in New York and Silicon Valley are paid more than nearly everyone else, their living expenses are higher, so they aren’t really wealthy. But where people live is a choice, especially for those earning above $200,000 a year. Higher salaries reflect higher costs, but also higher amenities.
Indexing federal tax brackets for regional cost-of-living differences would further complicate an already convoluted system. It would also be difficult to put into place. How would rate differentials be set? By state or by metro area? By source of income or by primary residence?
David Albouy, an economics professor, has examined mobility, income and federal taxes and found that our federal income tax already partly adjusts for local income differences through some of the largest itemized deductions. Deductions for mortgage interest and state and local taxes are often higher in high-income locations and are higher for those at the top of the income distribution.
Using the federal income tax system to smooth out regional cost-of-living differences may sound good in principle. But in practice, it would move us further away from simplifying our tax system and partly ignores the fact that people choose where to live, higher taxes and all.
