Michigan has been tangled up in a transportation funding back-and-forth for the last year or so. The most recent episode was a May ballot initiative to raise sales and gas taxes that failed 80-20. As of yesterday, news...
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- The Size of the 5.6% Millionaire's Tax
The Size of the 5.6% Millionaire's Tax
Congressional Democrats have proposed a new 5.6% surtax which would apply to AGI over $1 million as their latest attempt to find a politically palatable way to pay for the American Jobs Act. The surtax proposal replaces President Obama's proposal to limit the benefit of itemized deductions to at most 28% of their value. The new proposal targets very high-income taxpayers with incomes over $1 million, so I thought it would be interesting to look at a "typical" millionaire and see how such a taxpayer would be affected.
I'll start by defining what I mean by a "typical" millionaire because such a term can mean many different things. I'm not interested in the average of everyone making over that amount because that would include some ultra-high income taxpayers whose particular individual circumstances would overwhelm the rest of the data. It's better to look for the median taxpayer in this group, or at least an average of people close to the median.
According to the latest IRS data (2009), the number of returns (with itemized deductions) in various income groups over $1 million looks like this:
$1,000,000 under $1,500,000
$1,500,000 under $2,000,000
$2,000,000 under $5,000,000
$5,000,000 under $10,000,000
$10,000,000 or more
It's easy to see that the median return falls somewhere in the $1.5M to $2.0M group, and since the IRS doesn't subdivide its data into income groups any smaller than this, the best we can do is to use this group and take averages. Doing so (with a bit of rounding off for simplicity's sake) gives us a taxpayer with an AGI of about $1.8M, composed of $1.53M in ordinary income such as salaries and business or S-corp income, $200K in capital gains income, $70K in qualified dividends, and $255K in itemized deductions.
Below is a chart showing how such a taxpayer would be affected by the various tax increase proposals:
Since people making over $1M are the prime target for the surtax, it makes sense that it would be a bigger tax increase for them than the 28% limitation on itemized deductions. Both taxes are designed to raise roughly the same amount of revenue, but the surtax does so by targeting people making over $1M exclusively, while the 28% limitation could conceivably affect anyone making more than $212,300 (in 2011 - this threshold would be higher in the year when the provision actually takes effect.)
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