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How to raise taxes on millionaires without really trying

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Gerald Herbert/AP

(Read caption) Republican presidential candidate and former Massachusetts Gov. Mitt Romney speaks at a campaign rally in Traverse City, Mich., Sunday. Mr. Romney recently revealed that the effective tax on his income is only 15 percent. But a millionaire surtax' would not raise that much revenue, according to one analysis.

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Millionaires should pay more in taxes. As a group, they've weathered the stormy economy better than most of us. And given the need to find ways to reduce the federal deficit, sooner rather than later, taxing millionaires sure seems a lot better than most other options – certainly to those who are not millionaires, but even to some millionaires, too.

Billionaire Warren Buffett alerted the public that his average income tax rate is lower than his secretary's. Multimillionaire presidential candidate Mitt Romney revealed that his average tax rate is only 15 percent – the same marginal tax rate that a typical household earning $40,000 to $50,000 per year would pay (although their average tax would still be smaller than the GOP candidate's). [Editor's note: This sentence was changed to clarify the distinction between the marginal and the average tax rate for households.]  

These well-publicized examples have led many policy leaders, including President Obama, to call for changes to the federal tax system to honor the so-called Buffett rule, which in its most basic form says that millionaires and billionaires should face higher effective tax rates than middle-income households do.

One way to do this is through a "millionaire surtax."

This may be politically appealing because it explicitly targets the richest households, but it's economically unsophisticated. This amounts to raising tax rates above the $1 million gross income threshold without doing anything to reform the "Swiss cheese" of tax breaks, which allowed Mr. Buffett's and Mr. Romney's tax rates to fall so low in the first place.

Instead, the surtax would slap on through brute force an extra penalty tax rate on millionaires.


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