President Obama just dropped the hammer on millionaires. As part of his larger $3+ trillion deficit-reduction plan, the President announced a new tax, specifically aimed at the nation's millionaires. The tax will be called the "Buffett Rule," a reference to investor Warren E. Buffett, who has argued that the rich should pay higher taxes.
Although the administration was short on details, the basic concept is clear: any American who earns more than $1,000,000, whether as a result of earned income or investment income, will pay a new tax. I discussed the plan with Russ Mitchell last night on the CBS Evening News.
Administration officials say that the new tax will replace the onerous Alternative Minimum Tax (AMT), which dates back to 1969. That tax was supposed to be a surcharge on the wealthy, but over time, it has ensnared many middle class families. To replace the revenue raised from AMT, the new tax would have to raise about $100 billion a year and chances are, the plan would seek not to break even, but to bring in more revenue on the new tax than what would be lost from ending AMT.
The Millionaire's tax would aim to reverse a longer term trend, which has seen tax rates for the rich decline over the past decade, primarily due to the Bush tax cuts of 2001 and 2003. About 2/3 of the dollar value of those tax cuts went to the top 20 percent of income earners. Drilling down further on the Bush tax cuts, we find that about 20 percent of the benefit, or tens of billions of dollars, went to the top 0.1 percent of earners. The new tax would likely affect only 0.3 percent of taxpayers, according to administration officials.
How much money can the millionaire's tax raise? It's hard to say without exact numbers, but Ezra Klein noted that in early-2009, when a 5.4 percent surtax on income over $1,000,000 for joint filers, and $500,000 for single filers was proposed alongside health care reform, "the Joint Committee on Taxation estimated that it would raise $460 billion between 2010 and 2019. Adjust for economic growth and a similar proposal scored from 2012 to 2021 would likely raise more than $500 billion."
Considering recent data on household income from the Census Bureau, the new tax draws a line in the sand between the middle class and the wealthiest Americans. According to the data, US median household income in 2010 was $49,445, down 2.3 percent from 2009 and the 3rd consecutive annual drop. It was the first time since 1997 that households made less than $50,000 and more importantly, annual income is now roughly where it was in 1996, adjusted for inflation. Compare that to the long-term trend of the rich: from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent of taxpayers.
President Obama is attempting to use the tax code to reverse the trend, but the proposal has already been met with howls from Republicans in Congress, who are likely to fight the plan. Stay tuned--the rhetoric is about to heat up.
More on MoneyWatch: