President Donald Trump on Wednesday pitched a dramatic tax overhaul that would be "the biggest ever" tax cut for middle-class Americans. The pitch included few specifics, but if it resembles past blueprints, there is little doubt that it will indeed be a historically massive tax break—just for rich Americans like Donald Trump.
There are better ideas. One comes, surprisingly, from the chief adviser whom Trump just fired.
In July, several news outlets reported that Steve Bannon was pushing for a new tax rate for the richest Americans. Strangely, this puts the alt-right ringleader on the same team as Massachusetts liberals, who recently voted 134-55 to put a millionaire tax—a new tax on all income earned over $1 million—on the 2018 ballot.
While it’s unthinkable that Bannon would powwow with blue state legislators on policy specifics, their policies are actually pretty similar. The Massachusetts measure, known as the “Fair Share Amendment,” would create an additional tax of 4 percentage points on any annual income over $1 million. Bannon’s plan would create an additional tax of 4.4 percentage points on annual income over $5 million—so, a similar surtax kicking in at a higher level of income. (The White House always denied that it is seeking a surtax on millionaires, and Bannon’s exit makes it extremely unlikely that the upcoming tax proposal includes anything like it.)
What’s the strongest case for the millionaire tax? After all, federal taxes are pretty progressive already. Forty years ago, the richest 1 percent paid about 18 percent of the country's federal income taxes. Today, they pay about 40 percent. Some might say that’s quite enough.
But the most straightforward case for a millionaire tax involves some simple arithmetic. The number of million-dollar-earners in the U.S. has soared this century. According to the IRS, the number of households with an adjusted gross income greater than $1 million more than doubled between 2001 and 2014, the last year with complete data. No group has grown faster than the super-rich; the number of households earning more than $10 million grew by 144 percent.
The Growth of Million-Dollar Earners
Between 2001 and 2014 , income earned by millionaires grew twice as fast as income earned by the rest of the country, according to IRS data. In 2001, million-dollar earners collectively reported about $600 billion. In 2014, they reported about $1.4 trillion—yes, trillion.
Millionaires Are Making More and More Money
What’s more, the tax code’s progressivity actually pauses, and even reverses, at the top of the income ladder, for two reasons. First, the top tax bracket begins around $450,000. That means the last dollar earned for a typical urologist (average income: $460,000) is taxed the same as the last dollar earned by a typical Fortune 500 CEO making 10 times more than that.
Second, investment income, which accounts for a large portion of the richest Americans’ haul, is taxed at a preferential rate. As a result, the merely-rich often pay a higher tax rate than the super-duper-rich. For example, in 2011, Mitt Romney made about $14 million but paid just 15 percent of it in taxes, which is far below the average effective tax rate for an ordinary millionaire. It’s more typical for a household making just under $100,000. Why was Romney’s effective tax rate so small? Because most of his income came from investments.
There are ways to restore the progressivity of the tax code without adding a millionaire bracket, such as raising taxes on investment income or limiting high-earners’ deductions on state and local taxes and mortgage interest. But the benefit of a millionaire bracket is that it would be the most direct way to capture some of the extraordinary wealth of the rich to use it for the public benefit. (There might be political benefits, too: Cutting the mortgage interest deduction seems like an attack on homeownership; taxing millionaires might not be similarly criticized as an attack on the American dream.)
In an analysis of Bannon’s plan, the Tax Foundation calculated that the policy would raise about $26 billion per year over the next decade. But the Bannon proposal kicked in at $5 million. According to the IRS, American millionaires making up to $5 million collectively make about as much money as those earning more than $5 million. So let’s double the Tax Foundation’s estimate and assume a millionaire tax would fetch about $50 billion annually, or half a trillion dollars in the next decade.
This is a big pot of money, and there are all sorts of positive things a country could do with it. The U.S. could increase science funding, or expand the child tax credit and earned income tax credit, or both. But one particularly clever idea I’ve seen recently is to use the funds to address wealth inequality.
The share of wealth—not just earnings, but also savings—accruing to the richest 0.1 percent has grown from 8 percent in 1980 to more than 20 percent today. That’s its highest level in exactly 100 years, as Gene Sperling wrote in The Atlantic. Meanwhile, the median black family has just $7,100 in total wealth—just one-fifteenth that of the typical white family.
One way to address wealth inequality would be to create child trust accounts, or “baby bonds.” These would be, essentially, a sort of Social Security plan for infants. The authors of a 2015 report on racial wealth inequality propose giving American babies an automatic endowment, with an average value of $20,000. Babies from poor families would receive higher sums, worth up to $60,000. The federally managed accounts would grow at a guaranteed rate of 2 percent, and individuals could claim the money when they become adults. “With approximately 4 million infants born each year, and an average endowment of around $20,000, we estimate the cost of the program to be $80 billion,” the authors write.
That is a bit costlier than my back-of-the-envelope calculations for the millionaire tax would permit. The original estimate for the tax revenue produced by Bannon’s plan was about $25 billion a year. Twenty-five billion dollars divided by 4 million babies is about $6,000 per newborn. Appreciating at 2 percent annually for 18 years would grow to about $10,000 after 25 years, if left untouched. In other words, a relatively modest baby bond program could guarantee that every 25-year-old has access to $10,000 in assets—almost 50 percent more than the average wealth of a black American family today. Making the baby bonds progressive would net low-income children even more.
There are plenty of other deserving policies. But this is illustrative of what a millionaire tax might achieve—by skimming a bit more from the biggest winners of the U.S. economy, policymakers could achieve something life-changing for every newborn in the country.