In a revealing interview with Steve Moore of The Wall Street Journal, Representative Michele Bachmann(R-MN) called for repealing taxes on capital gains. She also said she strongly believes that everyone should pay some income tax.
This got me wondering: What would happen to the number of non-payers if the GOP presidential hopeful got her wish and Congress did abolish taxes on gains. My Tax Policy Center colleague Dan Baneman ran the numbers: Such a step would remove 23,000 millionaires from the income tax rolls, and cut their annual tax liability by an average of a half-a-million dollars. If all investment income (including interest, dividends, and gains) were made tax free—an idea backed by Tim Pawlenty, another GOP presidential aspirant– 57,000 households making $1 million or more would avoid paying any income tax, about 50,000 more than today.
Btw, this largess would add about $25 billion to the deficit in one year (eliminating taxes on gains only would reduce tax liability by roughly $11 billion for those $1 million-plus households who no longer paid income tax).
I readily admit these numbers are entirely misleading. In fact, they understate the benefits to the very wealthy because they include only those who would drop off the tax rolls entirely.
More than 200,000 households that make $1 million or more would enjoy a significant cut in their tax liability if the levy on gains were repealed. But they’d still be paying some income taxes. Dan estimates they’d get an average tax cut of almost $100,000 (half would get a cut averaging about $200,000 while one-third would pay an average of $2,500 more).
But for now, just look at this through Bachmann’s prism: When it comes to the income tax, she told Moore, “I think everybody should have to pay something.”
Fair enough. But how does that square with a plan that would eliminate tax liability for tens of thousands of those with the highest incomes
In a regressive sort of way, Bachmann’s plan does succeed. While making gains tax-free would eliminate all income tax liability for 23,000 filers making a million or more, it would add about 250,000 others to the rolls. Nearly all, however, would be low- and moderate-income. It is likely that many would become payers because they’d lose the ability to write off losses on the sale of assets.
Btw, TPC excluded other tax changes Bachmann proposed in her Journal interview. For example, she also proposed zeroing out the Alternative Minimum Tax and the estate tax, and cutting the top corporate rate from 35 percent to 9 percent. It also excludes behavioral changes, and I suspect lots of high-earners would turn more of their income into tax-free gains. All of these changes would very likely knock even more high-income households off the rolls.
Unlike Pawlenty, Bachmann didn’t say what she’d do with other investment taxes, though it is hard to imagine she’d retain a tax on dividends, for instance, after entirely eliminating the levy on gains. So TPC looked at what would happen to the number of non-payers if all investment income is excluded from tax.
Overall, this change would knock about 2.5 million more households off the tax rolls. On average, it would reduce the taxes of those who went from payers to non-payers by about $14,000. But those making $1million or more and dropped off the rolls would get an average windfall of nearly $500,000. Those making $30,000-$40,000 and had their tax liability zeroed out would get an average tax cut of less than $500.
Bachmann (who was once an IRS tax lawyer) holds bold and unyielding political views. But in this case, those ideas are strikingly at odds with one another.
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