Sizing up the millionaire tax

@CNNMoney October 6, 2011: 4:43 PM ET
President Obama said Thursday that he's

President Obama said Thursday that he's "comfortable" with Senate Democrats' millionaire tax proposal.

NEW YORK (CNNMoney) -- If Senate Democrats have their way, millionaires and billionaires will pay more in taxes for President Obama's jobs bill. How much?

Answer: $110,467 a year.

That's the average additional amount they would owe in federal taxes starting in 2013, according to estimates released Thursday by the nonpartisan Tax Policy Center.

How many households would be on the hook? 392,000, or 0.2%.

The proposal - which seems very unlikely to pass into law -- would add a 5.6% surtax on modified adjusted gross income over $1 million.

The surtax is different than an ordinary income tax rate.

First, it would be assessed on a larger amount of income. That's because modified AGI includes gross income minus so-called above-the-line deductions.

By contrast, taxable income -- on which ordinary income tax rates are imposed -- is gross income minus above-the-line deductions plus a host of other items, such as personal exemptions and tax credits.

Second, the surtax would apply to more types of income -- not only salaries, but also investment income such as capital gains and dividends. Currently investment income is taxed at lower rates than those imposed on wages.

Buffett Rule: Not so simple

Senate Democrats have said the surtax proposal could raise about $450 billion over 10 years. The Congressional Budget Office, working in conjunction with the congressional Joint Committee on Taxation, has yet to put out the official score to confirm that.

Surtaxes, generally speaking, are not considered great tax policy.

"We're putting in more chutes and ladders into an already overly complex code," said tax expert Len Burman, a public policy professor at Syracuse University.

What's more, "most tax economists would say the best way to raise revenue is to broaden the base rather than raise rates," said Jim Nunns, a senior fellow at the Tax Policy Center.

Broadening the base can be achieved by reducing the number of tax breaks in the tax code -- in essence, increasing the number of activities subject to regular taxation. That, in turn, could mean people start to put their money into activities and investments where it makes the best economic sense rather than where they get the best tax break.

Broadening the base, of course, is a main element of comprehensive tax reform, which is getting a lot of attention these days as Congress seeks ways to reduce long-term deficits.

But reform is rarely something that happens overnight.

And debating how best to reform the code can be a highly partisan affair.

Democrats want tax reform to raise more revenue than the current system. And Republicans want it to be revenue neutral. In their view, the act of tax reform can help spur economic growth and thereby generate more revenue that way.

The jobs bill doesn't offer a sunset date for the surtax. So it essentially would create a permanent tax increase on millionaires to pay for a short-term jobs bill.

The revenue raised in the first 10 years would be enough to pay for the cost of the bill. But beyond the 10-year window -- in theory anyway -- the revenue raised from the surtax could be used for deficit reduction.

And since it would increase the amount of revenue the current code generates, reforming the code after the surtax is added would raise the baseline for what's considered "revenue-neutral."

Given, however, that Republicans favor no tax increases whatsoever and they're not keen on the president's jobs bill, the surtax as currently proposed isn't likely to win the day.

But discussion of it does touch on an always hot-button political issue: Should the rich pay more?

"It's a fair question to say if we have to raise revenue for deficit reduction, should distribution change relative to where it is now," Nunns said.

- CNN's Ted Barrett and Kate Bolduan contributed to this report. To top of page

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