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The Size of the 5.6% Millionaire’s Tax

By: Nick Kasprak

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 surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. proposal replaces President Obama’s proposal to limit the benefit of itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s to at most 28% of their value. The new proposal targets very high-income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers 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:

Tax Scenarios Chart

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.)