A proposed federal “Millionaire Tax” has many of America’s wealthy elite bristling. Often called the “Buffet Rule” (after multi-millionaire Warren Buffet, who is credited with conceiving the idea), the proposed tax would adjust the Alternative Minimum Tax (AMT). The AMT is usually adjusted every year to keep up with inflation, but many feel it has not been adjusted enough to reflect current economic conditions, or that a more permanent solution is needed. When the present iteration of the AMT was introduced in 1982, it placed a surcharge on income over $250,000, which at the time was worth considerably more than it is today. The Millionaire Tax would push this threshold up to include only incomes over $1 million, ensuring they would get taxed at a rate of no less than 30%. This money would be used to fund schools, hospitals, and infrastructure projects, and could create new jobs that would help the nation’s struggling economy.Advocates argue that, with today’s disheartening employment outlook, the Millionaire Tax could bring some much needed relief for struggling middle and lower class families.
The Millionaire Tax would also address the problem with the capital gains tax. Traditionally, capital gains have not been counted as ordinary income and have been taxed at a lower rate. The fact that many millionaires don’t have traditional income and make the majority of their money from capital gains means they end up paying the lower 15% rate while most Americans pay a much higher rate. Capital gains also put some millionaires in a lower income tax bracket than they would be if these types of revenue were counted as income. The Millionaire Tax would mean that capital gains would be counted as income and taxed at the same rate. This would help ensure that millionaires end up in the highest tax bracket rather than in the lowest.
Those who think this tax seems like a radical new idea might be surprised to learn that the Millionaire Tax has already existed in several forms and in several states over the past few years. One state where the tax was arguably successful was California, which in 2004 added a surcharge to annual incomes over $1 million. The money was used to repair California’s mental health facilities as well as curb unemployment. In a state with an average unemployment rate of 11.1% (and in some counties is as high as 20%) — well above the national average — the Millionaire Tax helped fund projects that created or protected jobs. While the tax did not alleviate all of California’s financial woes, one could make the argument that it did no harm either. The California economy is a complex one, and the state still has its much-publicized problems, but supporters contend that at least the Millionaire Tax helped bridge the gap between income and outgo.
A proposed extension of the tax is currently being debated in California’s legislature. Lawmakers intend to use this tax to raise more than $5 billion each year over the next five years. While keeping higher taxes on California’s wealthy may seem like an ideal solution to some, critics say the revenue generated will be far less than expected, and that the extended tax hike may send millionaires running to other states with lower taxes. An editorial published in The Wall Street Journal claimed the Millionaire Tax caused an exodus from states in which it was implemented.
One example was Maryland, which imposed a Millionaire Tax in 2008 to offset a $1.2 million budget deficit. Though the tax expired at the end of 2010, Maryland’s Comptroller’s Office estimated the tax raised about $120 million. The WSJ claimed that over one-third of Maryland’s millionaires left the state because of the tax, a claim based on the decrease of million-dollar income tax return filings from 2008-2009. In a study conducted in New Jersey (another Millionaire Tax state), Stanford University’s researchers refuted the claim. Stanford reported the reason million-dollar filings went down is that everyone was making less money after 2008, which meant there were simply less millionaires around. In other words, millionaires didn’t leave the state, earners just didn’t make enough to be hit with the Millionaire Tax.
While the nation’s millionaires may not be excited about the prospect of higher taxes, they may have to accept them. President Obama’s proposed tax would exclusively affect these wealthy individuals , but could help raise revenue to pay off the ever-expanding national debt. Because of the vast amounts of money involved, this issue will always be hotly debated, but hopefully Washington can come to a conclusion that benefits all Americans, not just a select few.
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