How to tax millionaires, the right way

When it comes to taxing the wealthiest Americans, some methods are better than others in leveling the playing field.

By , Guest blogger

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    This file photo shows a protest rally at the State Capitol building in Madison, Wisconsin. Rogers argues that treating capital gains like ordinary income would be a huge step in fair taxation of the rich.
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My column in this week’s Tax Notes (subscription-only access here) focuses on just a few of the different ways we could get more tax revenue from millionaires, summarized in the table here  (The sources for all these numbers are various distributional estimates from the Tax Policy Center, referenced in the Tax Notes publication.)  The progressive nature of the federal income tax system, where tax burdens as a share of income in general rise with income through marginal tax rates that rise with income, and the implied upside-down subsidies created by poking holes in the tax base with exemptions and deductions (a.k.a. “tax expenditures”), makes it easy to raise tax burdens on the rich.  We can either make the rate structure steeper, or we can broaden the tax base for any given (already-progressive) rate structure.

Some ways are better than others from an economic efficiency standpoint, in that they level out the very uneven playing field, reducing the tax distortions between fully taxed and more lightly taxed (or untaxed) activities.  These would include proposals 3 and 4 –treating capital gains and dividends like ordinary income, and limiting itemized deductions to 28 percent.  Others might be viewed as preferable from a fairness perspective if the goal is to reduce income inequality and increase the share of the tax burden borne by millionaires–a statistic I dubbed “millionarity” in the table.  These include proposals 2 (letting just the high-end Bush tax cuts expire) and 5 (the millionaire surtax).  Still, my favorite tax policy option to point out is the one already in current law (#1 on the list above): letting all the Bush tax cuts expire, which scores low on “millionarity” but high in terms of total revenue raised and even the total dollar amount of higher taxes on millionaires.  You want to collect more in taxes from millionaires?  Just collect more taxes in general by not passing any more tax policy changes (allowing the Bush tax cuts to expire as scheduled, this second time around, at the end of this year), and you’re assured that you’ll get a disproportionate amount coming from those same millionaires who now disproportionately benefit from those tax cuts we keep extending (and deficit financing).

Another way to raise taxes on millionaires is to use yet another Alternative Minimum Tax (AMT), focused on millionaires only–like the proposal recently introduced by Senator Sheldon Whitehouse (D-RI).  I spoke with Forbes’ Janet Novack about why that’s more clever from a political perspective than an economic one.  Also in Janet’s column, my friend Len Burman astutely points out the huge incentive to divorce that would be created–if you’re lucky enough to be an unhappy but rich couple, at least.  

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