During Saturday’s CNN Democratic debate, Governor Martin O’Malley (D-MD) suggested creating a new tax bracket that would apply to income over $1,000,000, and taxing capital gains at ordinary marginal income tax rates. He claimed that these changes would provide sufficient revenue for the public investments he supports. Here is the relevant quote: “If we were to raise the marginal rate to 45% for people earning more than a $1,000,000, and if we taxed capital gains essentially the same we do earnings from hard work, sweat, and toil, you could generate $800 billion over the next 10 years, and that would do so much good for affordable college, debt-free college, cutting youth unemployment, investing in our cities again…” Governor O’Malley did not provide any additional details, but I think it would helpful to examine how a similar set of changes would impact government revenues. Using the Tax Foundation Taxes and Growth Model, I modeled the effects of adding a new bracket of 45% on income over $1,000,000 and taxing capital gains and dividends at ordinary income rates. I found that these changes would raise a considerable amount of revenue on a static basis, but substantially less on a dynamic basis. On a static basis, these changes would raise roughly $2 trillion over the next decade. However, these tax hikes sharply raise the cost of capital, leading to a decline in GDP of 4.2%. Accounting for this reduction in economic growth, they would generate $865 billion over the next decade. Table 1: Ten-Year Revenue Impact of Tax Changes (Billions of Dollars) Tax Static Revenue Impact (2015-2024) Dynamic Revenue Impact (2015-2024) Individual Income Taxes $2085 $1245 Payroll Taxes $0 -$312 Corporate Income Taxes $0 $6 Excise Taxes $0 -$27 Estate and Gift Taxes $0 -$11 Other $0 -$36 Total $2085 $865 Source: Tax Foundation Taxes and Growth Model, October 2015. Note: Individual items may not sum to total due to rounding. Distributionally, on a static basis these changes would reduce the after-tax incomes of the top 10% and top 1% of earners by 3.84% and 8.52% respectively. Other deciles would also see small reductions in their after-tax income, due to higher rates on investment income. On a dynamic basis, all income deciles would see reductions in their after-tax income as a consequence of the decline in GDP. Governor O’Malley is not the only Democratic candidate who has called for increasing taxes on wealthy individuals to pay for additional government spending. I find that eliminating the preferential treatment for capital income and imposing a higher tax rate on millionaires would raise a significant amount of revenue, but impose substantial burdens on economic growth and reduce after-tax incomes for most taxpayers. Table 2: Distributional Analysis for Tax Changes Effect of Tax Reform on After Tax Income Compared to Current Law All Returns by Decile Static Distributional Analysis Dynamic Distributional Analysis 0% to 10% 0.0% -3.94% 10% to 20% -0.01% -3.76% 20% to 30% -0.02% -3.77% 30% to 40% -0.05% -3.99% 40% to 50% -0.08% -4.22% 50% to 60% -0.11% -4.26% 60% to 70% -0.13% -4.23% 70% to 80% -0.16% -4.05% 80% to 90% -0.24% -4.02% 90% to 100% -3.84% -7.51% 99% to 100% -8.52% -12.05% TOTAL FOR ALL -1.67% -5.49% Source: Tax Foundation Taxes and Growth Model, October 2015