Millionaire tax: Smart politics, awful policy

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.