Americans might despise bankers and disdain our elites, but we've always been squeamish about taxing the rich. So when the House of Representatives proposed a surtax on the top 1.2 percent of the population to pay for about half of its health care reform bill, moderate Democrats immediately pounced on the measure as unsellable to their constituents. And so, Speaker Nancy Pelosi now says she's looking to squeeze only millionaire families for the precious billions needed to keep heath care deficit neutral over the next ten years. Is this realistic?
The speaker would like the trigger raised to $500,000 for individuals and $1 million for families, "so it's a millionaire's tax," she said. "When someone hears, '2,' they think, 'Oh, I could be there,' because they don't know the $280,000 is for one person.
"It sounds like you're in the neighborhood. So I just want to remove all doubt. You hear '$500,000 a year,' you think, 'My God, that's not me.'"
I think most people expected the original surtax to be watered down before it was inscribed into law, because watering down is what Washington does. Like golfing into a strong headwind, the best strategy with launching major legislation in DC is to swing too hard, and expect that every element of the weather will weaken your drive.
But I see no reason why this particular drive should fall short of its target, practically speaking. Passing a surtax on half-millionaires and up is really not very crazy at all. Historically speaking, it's remarkable how few tax brackets we use today to divide the richest Americans. As Economix pointed out this weekend, in inflation-adjusted terms, the top federal income tax brackets starts at $360,000 today. In 1960, that number started at $3 million, adjusted. If you're a believer in progressive taxes, looking to shrink the federal deficit, or both, there's good reason to want to put multi-millionaires in a higher tax bracket than Americans making one-tenth of their income.
That's especially true when you consider the effective federal tax rate. As Conor Clarke likes to say every few weeks, the reason Warren Buffett can say honestly that he pays less than his secretary is that his dividends and capital gains -- which constitute a much higher percentage of earnings for many of the richest Americans -- are taxed at a lower rate than salary income. Once you factor in the effect of these lower taxes, the effective tax rate for the richest 1% of Americans has done this over the last 15 years (graph from Clarke):
In short -- even accounting for the political headwind -- I don't see why it should be such a political impossibility to pass a future surtax that 1) Adds tax brackets after the $300K range, and 2) Brings the effective tax rate closer to its 1995 level.