The Democrat’s Millionaire Tax: Smart Politics, Awful Policy

By :: October 6th, 2011

Senate Democratic Leader Harry Reid’s plan to fund a $445 billion stimulus, err, jobs bill with a 5.6 percent surtax on millionaires is not all bad. After all, Tax the Rich does make a nice campaign bumper-sticker. But it is mostly bad.

Why? Here are five reasons.

  • The idea, endorsed today by President Obama, would raise the average tax bill of those making a million or more by $110,000, the Tax Policy Center estimates. Almost nobody else would pay a nickel. What’s wrong with that, you might ask if you don’t happen to make a million. To start, it perpetuates the dangerous myth that we can address our fiscal problems by taxing only a handful of rich people. Unfortunately, as my Tax Policy Center colleagues showed so well a couple of years ago, we can’t. There are not enough of them-- so their rates would have to be astronomically high (only about a half-million households will make a million or more in 2013).
  • Democrats now insist that somebody making $999,000 a year is in the struggling middle-class and needs to be protected from tax increases. It was ridiculous enough when President Obama decided that $200,000 ($250,000 for couples) defined middle class. It was even stranger when GOP presidential hopeful Mitt Romney adopted that number. Median household income in the U.S. is, um, $60,000. Sorry, but if we are going to get serious about the deficit, people making $200,000 (or even $100,000) have got to help out.    
  • Reid seems to be asking those who make a million or more to pay a top marginal income tax rate approaching 50 percent starting in 2013 (Here's how you get there: Allow the 2001/2003/2010 tax law to expire for high-income people after 2012—an idea Reid supports-- and members of the million dollar club would be paying a top rate of 39.6 percent and would lose benefits of their personal exemptions and standard deductions. In addition, the 2010 health law adds another 0.9 percent surtax on their wages starting in 2013. Finally add Reid's surtax). The Ds can set a top rate approaching 50 percent. But here is a clue: Rich people won’t pay it. They will, however, pay their accountants to help them game the system.
  • The capital gains rate on income over $1 million would nearly double in 2013. It is 15 percent today. Expiration of the Bush-era tax cuts would restore the rate to 20 percent. The 2010 health law adds 3.8 percent on investment income. The Reid bill would add another 5.6 percent. That gets us to 29.4 percent on Jan. 1, 2013. Imagine what will happen to the stock market in 2012 as investors scramble to beat the 2013 tax hike. Just what we need: more volatility.   
  • Perversely, these high rates would wreck efforts to clean up the tax code. With rates this high, the political pressure to protect tax preferences will be enormous. After all, the rich are going to fight much harder to protect breaks that are worth 50 cents on the dollar than one that is worth only 35 cents. And I stupidly thought the idea was to lower rates and eliminate these subsidies.

Reid’s bill won’t become law, of course. But that’s the point. Reid wants to be able to say that Republicans blocked a critical jobs bill just to protect their fat-cat millionaire pals. Give him credit for smart politics: By replacing the potpourri of tax increases Obama would have used to pay for his stimulus bill with a simple, easy to understand millionaire tax, the Senate Democratic leader has done a wonderful job clarifying his party’s message.

Too bad it’s such awful tax policy.

11Comments

  1. Michael Bindner  ::  4:53 pm on October 6th, 2011:

    An additional millionaires rate makes sense if part of a tax reform that shifts most tax collection to VAT and VAT-like Net Business Receipts Taxes, taxing only the top 20% of income earners and heirs with a progressive income surtax (necessary so that people don’t have to disclose their investments and inheritance to their employers or their employment to their investments for inclusion in the NBRT). While it is popular to equate tax simplification with less graduated income tax rates, I don’t see how this is necessary, given that tax tables give you one rate. No one making $150,000 a year wants to pay the same rate as a millionaire.

  2. Ralph H  ::  9:04 am on October 7th, 2011:

    Well Warren and Barack should be happy.

    Unfortunately, this will not raise much money and avoids the needed general increase for all income levels. It is coupled with more spending and really is a poor solution to debt.

  3. Occupy Wall Street Now Occupies Obama « The Enterprise Blog  ::  1:51 pm on October 7th, 2011:

    […] those folks with million-dollar incomes already pay a fifth of federal income taxes). Even worse, capital gains tax rates would nearly double to 30 percent. Higher marginal tax rates are bad for growth, and the surtax is […]

  4. Occupy Wall Street Now Occupies Obama | Accounting News  ::  5:22 pm on October 7th, 2011:

    […] those folks with million-dollar incomes already pay a fifth of federal income taxes). Even worse, capital gains tax rates would nearly double to 30 percent. Higher marginal tax rates are bad for growth, and the surtax is […]

  5. christopher tracy  ::  6:50 pm on October 7th, 2011:

    Couldn’t help but to notice that you said nothing about the fact such people (millionaires) received a tax cut under GW Bush and now pay a smaller percentage of income than those making mere tbousands per year. So does that mean you think that is fair for those well off to pay lower taxes than everyone else? Before you answer let me remind you Warren Buffett himself brought this up. So dont bother telling me this is false information.

    You also failed to point out the purpose of this tax hike isnt to close budget gaps – even Congressmen know that it isnt possible for millionaires to fill that hole. The point of the tax hike is to help pay for infrastructure repairs we badly need. Such repairs can be ramped up quickly, people get employed, and that in turn drives other peripherial jobs. Again, i should point out that in our history public works projects have done wonders in turning around our economy (see transcontinental railroad, interstate highways and Franklin’s New Deal).

    I will concede taxes for taxes sake wont solve our woes. But smart investment will. Besides I would much rather see infrastructure investment instead of war spending or bailouts. If you have something better to invest in right now, i would love to hear it.

    Thanks for listening.

  6. Observer01  ::  8:12 pm on October 7th, 2011:

    Of course it is political theatre, and of course it isn’t enough. But it is a start. Doing it doesn’t hurt the problem of deficit.

    Name one policy initiative proposed by a major political party anywhere in the world that doesn’t involve “political theatre”.

    This is a useless line of argument. If the point is simply that “it is not enough”, then this is not an argument against not supporting even this.

  7. Ralph H  ::  3:44 pm on October 8th, 2011:

    I hope this will add to the tax on Municipal Bonds. Oh thats right Millionaires pay zip on this. Why? Better yet why not end this tax dodge.

  8. Frank Carr  ::  2:10 pm on October 11th, 2011:

    You are duplicating number and combining apples and oranges. If the Bush tax cuts are allowed to expire the resulting revenue would eliminate the need for the Ried tax increase. Almost none of those with a millicn dollar incomes pay more than 16 or 17 percent in income taxes.

  9. Douglas Johnston  ::  5:59 pm on October 11th, 2011:

    What about this as the foundation for a rational tax policy towards reducing rates and loopholes?
    We support a progressive income tax, not simply because the rich have more money. We expect more taxes from the rich because their income is in large part due to their good fortune of working in greatest country ever known – the USA.
    Don’t think redistribution of wealth. Think fairness in the returns from our common investment in creating and maintaining the American money-making machine. It is a machine built by all of us. A progressive tax system allows the rich the fun and glitz of working where they do while distributing a share of their income, built on the great nation that we share, to we, the People, partners and shareholders in the USA.
    To understand this, try to imagine the huge salaries, bonuses, and retirement packages, common to the wealthiest in the US, being received in Bhutan, Chad, or Paraguay. The super-wealthy in the USA exist because the USA provides the means for super opportunity for property, industry, and investment.
    The typical CEO can only claim 5% of the responsibility of the company’s success. Steve Jobs, Thomas Edison, and Walt Disney are exceptions that prove the rule. Leadership studies of other chief executives support the general rule. For example, top generals and coaches recognize the limits of their roles in organization and strategy to success on the battlefield and the playing field.
    What else, then, might account for the huge difference in salary for the CEO of a national delivery service and that of its drivers? Does one work longer hours? Does one have greater personal risk? Greater financial risk? (Who gets large termination guarantees?) Does one actually produce goods and services that add to the cumulative, national wealth substantively and not just by manipulation of economic systems and institutions? (The super rich enjoy a growing share of the nation’s pie without expanding the pie and often, shrinking it. Higher income inequality leads to slower economic growth.) Are CEO’s 20 or more times smarter and more talented? Is it harder to recruit a successful CEO than a driver? Actually, most high salaries are attributable to friends on the compensation committees of their companies.
    We support tax cuts for the rest that trickle up to the rich: Cut taxes for everyone (rich and poor) by reducing the tax on everyone’s first amounts of taxable income with a long-term goal of having no tax on the first $52,000 of taxable income – our national median income.
    Everyone, rich and poor, benefits. Cutting the rate in the lowest bracket gives each tax payer the same tax savings as any other. More money to spend by the rest of us will increase the income of businesses and produce greater returns for their owner. A rising tide is still critical to lifting all boats. Helping to raise the lowest boats actually helps to keep the tide for yachts rising!
    Progressive marginal rates should begin at 5 or 10 times median national income – today approximately $52,000. Five times is $260,000; 10 times is $520,000.
    Certainly, one-size does not always fit all. For example, some allowance should be made for extra education costs incurred and the income deferred by entrepreneurs in considerations of the years they worked out of their garages and depended upon the spouse’s regular job to put food on the table. In addition, depreciation should be allowed to high paid athletes and others whose careers are shorter than normal. Tax expenditures would be limited, but to encourage home ownership, interest deductions should be allowed for mortgage payments on primary residence. After-tax 529-style savings plans should be available to provide for early retirements and for inheritances as well as college.
    Also, although it is not likely that we will see seriously large salaries of those in law enforcement and the armed forces, who actually do have greater personal risk than the rest of us, allowances might also be appropriate for them. Normally, however, we would expect the danger to be reflected in special pay and benefits.

  10. Alice McGee  ::  2:47 am on October 12th, 2011:

    Female representative from Illinois presented progressive tax bill last year of course was shot down!! The millionaire tax is being reported incorrectly–I think it raises taxes after the first million earned ie the second million!!

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