How Much Would Steve Bannon’s New Tax on Millionaires Raise?

August 9, 2017

A few weeks ago, some reports claimed that Steve Bannon, the White House Chief Strategist, supports a top tax rate of 44 percent on taxpayers earning more than $5 million. While this proposal was quickly batted down by the White House, it is still worth taking a look at.

The White House wants tax reform to provide a sizable tax cut to the middle class. But this may be challenging for the administration. Congress wants something roughly revenue neutral and the Trump administration has many expensive priorities. To accomplish both of these goals, lawmakers will need to consider many pay-fors.

If lawmakers were to consider a higher top rate on high-income taxpayers, how would that impact tax reform? Well, it depends. A higher top marginal tax rate’s impact on taxpayers, the economy, and federal revenues would depend to a great degree on how it is structured.

We estimate a new tax on taxpayers with income over $5 million would raise between $121 billion and $263 billion over the next decade on a static basis, and would reduce economic output by between 0.11 percent and 0.2 percent in the long run.

Economic Impact of a 44 Percent Tax on Taxpayers with Incomes over $5 Million, (2017-2026)
  Base 1: 4.4% tax on AGI over $5 million Base 2: 44% tax rate on taxable ordinary income over $5 million Base 3: 44% tax rate on taxable ordinary income over $5 million; full expensing of capital investments in baseline
Source: Tax Foundation Taxes and Growth Model (March 2017)

Static Revenue (Billions of Dollars)

$263 $127 $121

Dynamic Revenue (Billions of Dollars)

$205 $85 $87


-0.20% -0.14% -0.11%


-0.13% -0.09% -0.06%

Full-time Equivalent Jobs (Thousands of FTE Jobs)

-80 -66 -55

To show how a Bannon Surtax could work, I model three possible ways of implementing it. The first is a top tax rate with a broad base. This is basically a 4.4 percent surtax on Adjusted Gross Income over $5 million. The second tax base is a new tax bracket for taxable ordinary income over $5 million. The last is a 44 percent ordinary income tax bracket over $5 million, but in the context of a baseline in which pass-through businesses can fully expense their capital investments.

Base 1: 4.4 percent surtax on Adjusted Gross Income over $5 million

The first way lawmakers could implement Bannon’s 44 percent tax rate on taxpayers over $5 million is by enacting a 4.4 percent (39.6 percent plus 4.4 percent = 44 percent) surtax on AGIs over $5 million. Under this proposal, all types of income would be subject to this new tax: wages, salaries, capital gains, dividends, interest, and business income. No itemized deductions could be taken against this tax, but taxpayers could utilize any above-the-line deductions.

Due to its rather broad base, it would raise about $263 billion on a static basis over the next decade.

However, because this tax would fall on both investment and business income, it would reduce the after-tax return to both corporate and pass-through business investment, leading to lower investment overall. We estimate it would reduce the long-run level of GDP by 0.2 percent, which would result in 0.13 percent lower wages and about 80,000 fewer full time equivalent (FTE) jobs. A 0.2 percent reduction in the long-run size of the economy is equal to about a 0.02 percent reduction in the annual GDP growth rate over the next decade.

The slightly smaller economy would ultimately lead to a narrower tax base, especially for the income and payroll tax. As a result, this tax would end up raising $205 billion on a dynamic basis.

Base 2: 44% tax rate on taxable incomes over $5 million

One of the reasons the 4.4 percent surtax has a noticeable impact on the long-run economy is that it falls on corporate capital investment by taxing qualified dividends and capital gains income. To reduce the economic impact of the tax, lawmakers could narrow the base by only applying it to ordinary taxable income: wages, salaries, interest, and business income. This method of implementing the tax would also allow individuals to take itemized deductions against their tax liability, narrowing the base even more.

Due to its much narrower base, the 44 percent tax bracket would raise significantly less than Base 1, the broad surtax on AGI. We estimate it would raise $127 billion over ten years.

Since ordinary income excludes investment income (qualified dividends and capital gains), the top bracket of 44 percent would have about three-quarters the impact on the economy. GDP would fall by 0.14 percent in the long run. Wages would fall by 0.09 percent and FTE jobs would fall by 66,000.

Base 3: 44% Tax Rate on Taxable Income with Expensing for Pass-through Businesses in the Tax Base

The remaining concern with an increase in the top marginal tax rate is that it falls on pass-through business investment. If you are, say, a large S-corporation that manufactures widgets, this tax increase would increase your investment costs. Economy wide, this would result in less investment and lower output, productivity, and wages.

The easiest way to make sure that the higher top marginal rate does not fall on pass-through business investment is to provide expensing to these businesses. Allowing companies to immediately deduct the full cost of all purchases of productive capital assets (machines, factories, buildings) would essentially remove them from the tax base. This is the central component of the House GOP Blueprint and why we think the proposal would significantly increase the long-run size of the economy.

Under this third proposal, we assume that expensing for capital investments is already a feature of the tax base. We then add a top rate of 44 percent for taxable income over $5 million. The ultimate effect is that the top rate would apply to wages, salaries, interest, but would exempt marginal investments by pass-through businesses.

With full expensing in the baseline, a new top rate of 44 percent would raise $121 billion over the next decade on a static basis–$6 billion less than a base without full expensing. This is about a 5 percent change in revenue relative to Base 2.

More importantly, though, is that having a better tax base—one that exempts pass-through business investment—reduces the economic impact of a new 44 percent top marginal tax rate. With expensing available, the new 44 percent tax rate on taxable income over $5 million reduces the long-run size of GDP by 0.11 percent. This is a 22 percent smaller impact on output than Base 2, which fell on pass-through business investment. Wages would fall by 0.06 percent, which is two-thirds the impact that this tax would have without full expensing (0.09 percent).

Most interestingly, the 44 percent tax rate ends up raising slightly more with expensing in the base ($87 billion) than without ($85 billion). This is because the tax, which would no longer fall on pass-through business investment, would be more economically efficient.

The revenue and economic impact of a new top rate on taxpayers with income over $5 million will obviously depend on the final parameters. A broader surtax on high-income taxpayers would raise the most—about $263 billion over a decade—but would have a more meaningful impact on the economy because it would hit capital income to a large degree. In contrast, a 44 percent rate on a narrower base that also protects pass-throughs by providing expensing, would raise less revenue ($121 billion over a decade), but much more efficiently.

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