Economy / Fiscal policy / Politics / Tax

The “Millionaire’s Tax” and the need for more serious reform

By Will Portman

Yesterday I attended a panel entitled “A Millionaire’s Tax and the Economy” at the Center for American Progress. One of the panelists, Senator Sheldon Whitehouse (D-RI), discussed his bill, the Paying a Fair Share Act, which would mandate that individuals earning above $2 million a year pay at least 30 percent federal income tax on all their earnings, and that individuals earning between $1 and $2 million a year pay at least 30 percent federal income tax on any earnings above $1 million. Dividends and capital gains would be included in this definition of income, and the bill would maintain the current deduction for charitable contributions.

Sen. Whitehouse claims that his legislation would prevent the wealthy from taking advantage of the many loopholes, credits, and deductions in the federal tax code. And it certainly would, although the lawyers and accountants that had previously specialized in this area for their wealthy clients would simply begin offering a new service: finding ways to hide as much of their clients’ annual income in excess of $1 million as possible.

Additionally, if the federal tax code is so riddled with unfair provisions, and it is, then we ought to dramatically overhaul and simplify it — getting rid of most preferences but keeping those few that make sense, and using the extra revenue to lower rates across the board, achieving greater simplicity and efficiency, and thus more growth, in a revenue-neutral manner. Implementing a stopgap measure such as this one, which would ban only a small sliver of taxpayers above an arbitrary income threshold from taking advantage of the tax code’s many ridiculous preferences (as those in lower tax brackets would continue to be able to do), would only reduce the likelihood of achieving comprehensive reform in the near future.

Finally, the main effect of Whitehouse’s bill as it pertains to the economy is that it would effectively dramatically increase rates on top earners’ income from capital gains and dividends, exacerbating the problem of double-taxation on these earnings and thereby slowing growth by further disincentivizing investment and entrepreneurship. As John Berlau and Trey Kovacs noted in The Wall Street Journal in January, “the tax rate on investors is unfair … our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35% – which even President Obama acknowledges is one of the highest in the world.”

Sen. Whitehouse’s bill is the legislative embodiment of the so-called “Buffett Rule,” named after billionaire Warren Buffett, who famously claimed that he pays a lower federal tax rate than his secretary. The Buffett Rule stipulates that high earners shouldn’t pay lower effective federal tax rates than the middle class. But the reason some (not many) do is because they legally take advantages of certain features of the tax code that ought to be eliminated for everyone, including those making $999,999 or less annually, and/or because their capital gains and dividends earnings have already filtered through the corporate tax system.

There is another Buffett-inspired piece of legislation that makes more sense, even if it’s a little cheeky. As a response to calls from Mr. Buffett last fall for higher federal tax rates on himself and other high-income Americans, Sen. John Thune (R-SD) introduced the Buffett Rule Act of 2011 “to create an option [on tax forms] for individuals who believe they are under-taxed to voluntarily send extra money to the U.S. Treasury for the purpose of paying down the national debt.”