How Democrats’ Proposed Millionaire Surtax Would Work

(Bloomberg) -- A surtax on millionaires is under consideration by Democrats in the U.S. Congress trying to pay for President Joe Biden’s $1.75 trillion social spending plan. The add-on could increase the top tax rate on income to as much as 45% for tens of thousands of well-off Americans, up from 37% currently. It’s an alternative to a series of proposals to tax wealth, not just income, including a proposed billionaire tax that was shot down almost as soon as it was raised.

1. How would this new levy work?

Taxpayers with income above $10 million in a given year would pay an additional 5% levy on top of the 37% top rate. Incomes above $25 million would have another 3% surtax tacked onto that. Some high-earning taxpayers that have certain types of business income could also pay an additional, separate 3.8% Medicare tax, meaning that tax rates could be nearly 49% for some very wealthy people. If enacted, the new levies would begin next year. Trusts and estates could also be hit by the surtax, at much lower thresholds. The 5% surtax would kick in at $200,000 in income, with the additional 3% applying at $500,000 of income, according to a draft of the legislation.

2. How many people would have to pay?

The White House estimates that 0.02% of American households -- that’s two out of every 10,000 -- will be subject to this levy. About 22,112 people filed tax returns reporting more than $10 million in income in 2018, according to Internal Revenue Service data. IRS records don’t break down estates and trusts with $200,000 in annual income, but in 2014, the most recent year for which such data exists, about 130,164 taxable estate and trust returns reported at least $100,000 in income. 

3. How much money would the surtax raise?

The White House projects it will raise $230 billion over a decade. The plan still needs to be vetted by the nonpartisan congressional Joint Committee on Taxation, which publishes the official estimates for tax legislation. 

4. Where did this idea come from?

Senator Chris Van Hollen of Maryland and Representative Don Beyer of Virginia, both Democrats, have been developing the surtax since 2019. It was among the ideas debated by Democrats during the 2020 presidential primaries as several candidates looked for new ways to tax the wealthy. It was, and remains, an alternative to more complicated proposals to tax the wealth, rather than the income, of the richest Americans.

5. Why is it having its moment now?

Democrats, who control both the House and Senate, need revenue to pay for the spending plan that is central to Biden’s presidential agenda. Democratic Senator Kyrsten Sinema of Arizona, a key holdout on other proposed tax increases, said she could support a surtax on super high-earners.

6. What do Republicans say?

Republicans in Congress have been united in opposing any efforts to raise taxes. They say Democrats are targeting job creators and trying to redistribute their wealth.

7. How likely is this to become law?

If Democrats manage to pass a tax and spending bill, the surtax will almost certainly be included. It has widespread political support among Democrats, who have advocated making the tax code more progressive. Party leaders say they want to pass the bill before the end of the year -- or even sooner if they can gain consensus.

8. What happened to the billionaire tax idea?

That levy would have required Americans with at least $1 billion in net worth to pay taxes on their unrealized gains every year, instead of just when they sold stock or other assets. Critics said it was too complicated and could face constitutional and other legal challenges, and it wasn’t included in the White House plan. 

The Reference Shelf

• The White House makes the case for a $1.75 trillion social spending bill.
• A reference list of the taxes the White House is considering.
• Advocates for the millionaire surtax have created a website.
• Bloomberg Opinion columnist Alexis Leondis suggests a better way to tax billionaires.
• A summary of the House-written tax bill.

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