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How Much Revenue Would a Millionaires’ Tax Raise?

Writing for the New Yorker, James Surowiecki floats an idea that we’ve discussed here before: instituting a new tax bracket on earnings in excess of $1 million. Clusterstock’s Joe Weisenthal isn’t entirely disagreed, but is skeptical that it would “move the needle” much in terms of revenue.

Fortunately, it only takes a few minutes to come up with some good working estimates, using data from IRS Tax Stats.

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In 2007, essentially the last non-recession year (although technically the recession began in December that year), there was $1,244 billion ($1.24 trillion) in taxable income reported from 390,820 filers earning $1 million or more. However, a millionaires’ tax bracket would affect marginal income only, so we have to subtract out the income below $1 million earned by these filers, which is $391 billion. That leaves a pool of $853 billion per year from which to draw taxes. If you taxed it at 3 percent, you’d bring in $26 billion per year, or $256 billion over ten years. If you taxed income above $1 million at 5 percent, you’d produce $43 billion per year, or $427 billion every ten years.

If you were interested in instituting a further tax bracket above and beyond this at say $5 million in income, you’d have a basis of $436 billion in marginal taxable income from which to draw. A 3 percent levy there would produce $13 billion per year, or $131 billion per ten years, in revenue. A 5 percent levy would raise $22 billion per year, or $218 billion per decade.

Let’s say we go with the plan of taxing marginal income above $1 million at 3 percent, and marginal income above $5 million at an additional 3 percent. That would produce a theoretical $39 billion per year. However, there would be some productivity losses, and perhaps some additional offsets resulting from people finding ways to transfer their income into more tax-advantageous activities, so perhaps revenues on the order of $35 billion per year, or $350 billion per decade, are more realistic.

Is that a “lot” of money? Perhaps it doesn’t seem like it in comparison to some of the major spending programs of the past 24 months. But obviously it isn’t trivial either. This may be a helpful comparison: it would bring in slightly more money than if we were to increase taxes by 1 percent on incomes above $50,000, which would raise $28 billion per year before productivity losses.

Squeezing the super-rich is not a panacea. Although the inequity in the income distribution is pretty stark in America today, there just aren’t that many people earning over $1 million, or over $5 million, and you probably can’t squeeze them that much further before you start to run into some serious issues with productivity losses, particularly if the Bush tax cuts for high-income earners indeed get rolled back and the tax increases that we’ve seen at the state and local level over the past couple of years tend to stick, which I think is likely.

Nevertheless, at least based on this back-of-the-envelope sketch, creating one or more tax brackets at $1 million and up, and levying taxes upon them at a 3-5 percent marginal rate, could fairly easily offset a 1 percent or perhaps 1.5 percent tax increase on the middle class. That doesn’t mean that we wouldn’t eventually need to consider middle-class tax increases as well, although my preference would be to achieve them by means of a carbon tax, which would fall fairly heavily on the middle class if it weren’t offset, rather than an increase in marginal tax rates. But it can certainly be a part of the solution and it seems irresponsible not to discuss it along with other ideas.

Nate Silver is the founder and editor in chief of FiveThirtyEight.

Filed under Taxes 51 posts, Income 25, Federal Budget 17, Budget Deficits 8, Deficit Reduction 4

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