Senate Majority Leader Harry Reid would prefer to mostly pay for President Obama’s jobs package via a 5 percent surtax on millionaires rather than by trimming deductions for high-income taxpayers. This has at least a few political advantages for Democrats. First, it makes for an easily understandable talking point. Second, it has a better class-warfare angle since it would probably apply to just those taxpayers with incomes of $1 million or more, a mere 0.3 percent of the population. Obama’s plan would hit households with incomes of $250,000 or more. Third, liberal activists will love it. A similar surtax was included, for instance, in the budget put out earlier this year by the Congressional Progressive Caucus.
But the economics are horrible. It would sharply increase marginal tax rates on high-income folks, giving them another reason to search out tax shelters. So it is unlikely the tax would raise anywhere near what Democrats expect. And how, again, would this create jobs, other than for tax attorneys? Higher marginal tax rates reduce incentives to work, save, and invest.
The surtax also gives the false impression that the way out of America’s debt trap is by taxing the rich. The Tax Policy Center ran a simulation where it tried to balance the budget by 2020 with two-thirds of deficit reduction from spending cuts and one-third from taxes just on couples making $250,00 or more. The TPC found that “if they had to pay just through higher rates, the top bracket on ordinary income would rise to more than 67 percent and the rate on gains would approach 50 percent. Note to the president: This isn’t going to happen.”
And neither is this surtax, thankfully.