Will the Millionaire Tax Raise Enough Revenue?

Will the Millionaire Tax Raise Enough Revenue?

Robert Frank
Wall Street Journal
Oct. 7, 2011

The proposed 5.6% surtax on people making $1 million or more is supposed to raise $450 billion over 10 years. At least, that’s what Democrats say, since it’s purpose is to pay for the President’s $447 billion jobs bill.

But would it really raise enough?

Projecting tax revenue is always a crap shoot. The Congressional Budget Office and Joint Committee on Taxation have yet to put out their number.

Projecting revenues from a tax on people making $1 million is more like playing the lottery–the chances of getting it right are slim to none. That’s because the incomes and taxes paid by the million-plus earners are among the most volatile in our economy and are prone to sudden surges and crashes.

See the chart below, which uses data from the IRS. It shows that the number of million-plus filers has had swings of up to 40% over the past decade. Their incomes are even wilder, with swings of over 50%.

The total amount of taxes paid by this group hit an initial peak of $233 billion in 2000, then tumbled to $132 billion by 2003, surged again to $319 billion in 2008, and tanked to $177 billion in 2009. Since 2009 is the latest data available, we don’t know what happened in 2010.

The swings are due, of course, to the stock market. Most of the million-plus earners make their money from either capital gains and investment income or from stock-based compensation. Their highs and lows basically follow the stock market.

Given the stock market’s violent gyrations this year and possibly next, it’s likely that the incomes of the million-plus group will also race up and down. The only way to predict their incomes is to predict the stock market, which is, well, a fool’s game.

Does this mean there should be no new tax on the million-plus earners? Not at all. I’m not arguing for or against the idea of raising taxes on the highest earners. And it doesn’t matter, since it won’t pass anyway.

The point is that revenues from any taxes on the ultra-earners will be prone to radical and unpredictable swings. Rather than saying “This tax will raise $445 billion,” they should say “This could raise $445 billion, or $600 billion, or $200 billion.” They should be highly flexible any policy funded with the tax so that it can expand and contract with the revenues.

That’s not going to happen, of course. In the meantime, any politician who says the tax on the rich will raise a certain amount of revenue is playing politics, not practicing economics.

What do you think will happen to the incomes and taxes of the million-plus earners in the next five years?

Of course it's a fiction that this new tax will raise the amount Obama claims. Everything this president has proposed is based on lies and fiction.