Tax Analysts Blog

The Rich Are Finally Paying More in Taxes

Posted on Mar 31, 2015

The centerpiece of President Obama's tax platform has always been that wealthy taxpayers should be paying more. He ran on it in 2008, and his budgets and tax reform plans have always featured new revenues from higher-income individuals (or multinationals). Although much of his agenda has foundered, Obama has gotten his wish in this area on the individual side. Two tax increases that were part of Obamacare took full effect last year, raising over $23 billion. That's on top of money raised by changes made under the American Taxpayer Relief Act (ATRA) to the top bracket.

According to recently released IRS data, 3.1 million taxpayers paid net investment income tax totaling $16.5 billion in 2014. Over 2.8 million taxpayers paid $6.5 billion in additional Medicare tax, according to the IRS. The Wall Street Journal reported that that was about $3 billion more than expected.

The extra $23 billion is on top of over $40 billion raised by the new tax rate structure put in place by ATRA. The switch to a 39.6 percent bracket meant that in 2013, the top 400,000 taxpayers paid about $90,000 more in taxes, according to data from the Tax Policy Center. That means that just from these three provisions (the 39.6 percent bracket, the net investment income tax, and the increased Medicare taxes), upper-income taxpayers paid almost $65 billion more in taxes. That's nothing to laugh off.

The Journal article makes it seem like just the extra Affordable Care Act taxes are a bit too onerous, and some analysts (both right- and left-leaning) would argue that there's only so much the United States can squeeze from the wealthy before it needs to consider broader tax increases (such as consumption taxes or rate increases for middle-income taxpayers). The refrain is that Democrats and the president need to find other targets if they want more revenue. Some believe that the whole point of raising this marginal amount of money from the upper crust was to provide political cover for larger-scale tax increases on a broader spectrum of the country in the future.

Let's assume for a moment that more tax increases will be necessary in the future (even though it's not really that clear that the United States' fiscal position is as dire as some warn). Paul Krugman wrote after ATRA that additional tax increases equal to about 2 percent of GDP would be needed to stabilize federal finances. Can the United States really not raise that revenue from the wealthy?

Until lawmakers take a more serious look at the capital gains preference (the main reason that the superrich pay lower marginal tax rates than the merely rich or high-income wage earners), it's hard to say that the United States has truly explored all of its progressive tax increase options. And that's leaving aside the fact that some trimming of tax expenditures such as the mortgage interest deduction (dropping the deduction for second homes, for instance) or the deduction for state and local income taxes (a subsidy for state governments that really only benefits a small sliver of taxpayers) could raise some revenue.

So the rich are paying more in taxes under Obama, but if lawmakers need more revenue (something voters shouldn't concede), they should keep looking to the 1 percent and not to everyone else. They haven't exhausted all the options (or even the best options) yet.

Read Comments (1)

edmund dantesMar 31, 2015

"Until lawmakers take a more serious look at the capital gains preference (the
main reason that the superrich pay lower marginal tax rates than the merely
rich or high-income wage earners)"

Is there sound documentation on the effect of this on revenue collections? I
believe the more important preference is complete tax freedom of muni bonds.
We've already raised the top capital gains rate from 15% to 23.8%, but have
never touched the tax benefit for muni bonds. So we've already substantially
closed the marginal rate gap attributable to capital gains preferences.

Additionally, isn't the larger benefit of owning stocks that taxation is
deferred until a gain is realized? Wouldn't an increase in the tax rate simply
slow the rate of realizations, resulting in lower tax revenue? I believe that
when rates were lowered back in the 80s there was a substantial unlocking of
built-up gains. The result was that capital gains revenue shot up, at a time
when JCT had predicted revenue would fall from the rate cut. Why wouldn't a
drastic increase in tax rates have the same effect, but in reverse?
Stockholders have proven that they are very sensitive to marginal rates and
will modify their behavior to respond.

The French have experimented with extravagant taxes on the rich, and it hasn't
turned out well. If we truly want more revenue, look to those who are paying
no taxes at all now, the billion-dollar endowments of universities and
foundations.

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