Democrats Propose Another Surtax on Millionaires

According to the Wall Street Journal, Democrats are attempting to revive the president's jobs bill by proposing a 5% surtax on all income earned above $1 million--capital gains, dividends, whatever.  I'm not seeing how this revives the bill, since the GOP is probably going to filibuster it anyway.  But it's certainly an interesting proposal.


If we add in the Medicare surtaxes which start in 2013, then for a person earning a million dollars a year (we really need a better word for this than "millionaire", which already has a meaning), the marginal tax rate on long-term investment income for this group jumps to 24% in 2013, from 15% now, while the marginal tax rate on earned income will be (assuming the Bush tax cuts expire like they're supposed to) 48.5%.  This of course does not include any state income taxes, or property taxes.  The tax penalty on earned income seems likely to rise well over 50% for the typical high earner under Democratic plans.  Most left-leaning pundits and wonks do not seem to believe that millionaires pay attention to decreasing returns to effort.  I confess, I'm a bit more skeptical.

The real question, however is this: what do you do for an encore?  They're hiking taxes on this lucky group 5% to pay for one temporary jobs measure.  What happens the next time Democrats need some money to pay for something?  Surely we need to leave millionaires a little something for themselves on their marginal dollar, say 10%--a sort of tip for good service.  And the state and local tax people will want their bite too, so you'll need to leave another 10-15% so that those high-tax jurisdictions where sound Democratic politicians like Senator Schumer campaign can enjoy their full bite.

Since the current trend is a 4-5% hike on high-earners every time new spending is required, that seems to indicate that Democrats have only about five bites left at the apple.  Then they'll be out of money for new programs.  That's assuming, as they seem to, that rich people don't care about money, and will not change their behavior in response to higher tax rates.  If that assumption is wrong, then they reach the end of this particular rope much sooner.

Presumably the next step is people who make over $250,000 (which is, indeed, the group already targeted by the Medicare surtaxes).  But this group contains a lot of solid Democrats who do not, in my experience, think that the socially just marginal tax rate on such incomes is 80%.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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