The “millionaire’s tax” will affect more people than you think

Who Wants to Tax a Millionaire?
Veronique de Rugy

…the health care bill that the House narrowly approved in November included a 5.4 percent tax on the portion of gross income (which includes capital gains and dividends) that exceeds $500,000 for individuals and $1 million for a couple. The surtax would apply to tax years that begin after December 31, 2010. So the first sign that the tax will hit more than millionaires is the fact that it targets half-millionaires from the get-go.

The idea’s main selling point is that the in-crease would hit only 0.3 percent of tax filers —roughly 400,000 people—yet would raise $460.5 billion over the next 10 years. Congress’ Joint Committee on Taxation estimated that the new rate would affect only 1.2 percent of relatively small business owners, including sole proprietorships (that is, businesses owned by just one person), partnerships (owned by a few people), and S corporations (which have up to 75 shareholders). But because the tax isn’t indexed for inflation, over time it will apply to more taxpayers as inflation affects income levels.

Sound familiar? It should, because this is how the alternative minimum tax (AMT) became such a nightmare. The AMT was created in 1969 to prevent just 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes. Because it was not indexed for inflation, it came to affect an ever-growing share of the population, prompting Congress to pass a patch each year limiting its reach; next year, without the patch, it is projected to strike 27.4 million Americans—nearly 20 percent of the country’s taxpayers. And even with the patch, the AMT hits far more than just millionaires: In 2009, it swept up 4 million families living in high-tax states who merely took multiple deductions for dependents and houses.

The same process would happen with the millionaire tax. According to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution (not exactly anti-tax organizations), by 2019 the number of taxpayers subjected to the health care bill’s tax will have doubled. If inflation hits harder than the center’s analysts assume, the number will be even higher. Either way, it will keep climbing, gradually assimilating more and more people who never thought they’d be considered super-rich.

And many people classified as millionaires aren’t millionaires at all. Out of the 300,000 or so joint tax filers earning more than $1 million, about 90 percent have small business income. That’s because 75 percent of America’s small businesses are structured as pass-through entities and pay their business taxes at the individual level. So the $1 million isn’t going into those individuals’ pockets; it’s money they use to run their businesses. To avoid the new tax, those businesses would have to adopt a new structure and start paying the complicated corporate income tax.

As income taxes increase on very productive people and small businesses, they will be less willing to hire or keep employees…

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