A week ago today, I embedded a video that the left-wing blog Think Progress had prepared showing alternatively images of Ronald Reagan and Barack Obama denouncing tax loopholes for millionaires. The bloggers (and the president) are trying to make the point that the incumbent is following his conservative predecessor in seeking to hike taxes on “millionaires and billionaires.”
The only problem (as I pointed out in that post) is that the Gipper (working with Democrats in Congress) favored comprehensive tax reform eliminating loopholes whereas his big-spending Democratic successor favors a more piecemeal approach, imposing a surtax on millionaires.
And, to be sure, that surtax might generate some revenue for the federal government, but not enough to cover the cost of the president’s proposed extension of the “payroll tax holiday”. Over at Powerline, John Hinderaker linked a study showing it might only generate $21.437 billion.
And despite this paltry amount (comparatively) such a surtax would add to the federal coffers, the real issue is that it won’t begin to address the problem of some millionaires not paying their “fair share.”
Let me illustrate.
Say, there are two millionaires, Mr. Smith and Mr. Jones, each taking home annual incomes of $2 million. Every year come March, Mr. Smith collects his various pay stubs, itemized list of charitable donations, bank statements and etc., and on his home computer, plugs the numbers into TurboTax. He ends up paying 25% of his income, or $500,000, to the feds.
Meanwhile, Mr. Jones has an accountant who, for an annual fee of $25,000, keeps an eye on his client’s finances. Said accountant e-mails Mr. Jones in January, asking him for a great variety of documents. These, he and his secretary, readily provide. (Throughout the year, the accountant had been alerting Mr. Jones to various ways to invest his income, etc., in order to limit his tax liability.) As a result of this accountant’s hard work (and his intimate knowledge of the intricacies of the federal tax code), Mr. Jones pays a tax bill of $350,000 or 17.5% of his income. The extra $25,000 he paid to the accountant deprived the federal government of a $150,000 of his income and netting him $125,000*.
Despite having an identical gross income to Mr. Jones, Mr. Smith pays $150,000 (or 43%) more in taxes.
So now comes the surtax.
Each man would have a 3.25% tax on $1 million (the amount he earned over $1 million), or $32,500. Now, Mr. Smith sees his tax bill shoot up to $532,500 while Mr. Jones sees his jump to $382,500, yeah the latter has a higher rate of increase, but that’s because he had been paying a smaller amount of tax. Mr. Smith still pays more than Mr. Jones.
The surtax penalizes the millionaire who hadn’t availed himself of loopholes.
The federal government nets $65,000 from the two men, less than the $150,000 it would get if it eliminated the loopholes that allowed Mr. Jones to cut his tax bill.
Obviously, this simplifies things, but in order to make a point: unless we have real tax reform, some millionaires and billionaires, thanks to their ability to hire accountants and lawyers whose job it is to understand the intricacies of the tax code, will still manage to limit their tax liability. The president’s demagogue notwithstanding, the surtax will not eliminate the loopholes — and would increase the tax on those millionaires who have not availed themselves of loopholes.
*The $150,000 less the $25,000 he paid his accountant.