President Obama appeared more concerned about achieving tax “fairness” than raising revenue in his State of the Union speech last Tuesday. He wants people with annual incomes of $1 million or more to pay no less than 30 percent in taxes to the federal government. If that proposal was passed, it would do more than level the tax field, it would help reduce the federal deficit. According to a Fiscal Times analysis of Internal Revenue Service data, Obama’s plan could add at least $30 billion to the federal coffers, depending on how the White House structures the program.
“You can call this class warfare all you want,” Obama said Tuesday in his televised address to Congress. “But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense…Washington should stop subsidizing millionaires.”
According to the most recent 2009 data from the IRS, the 236,883 richest American households with income over $1 million and adjustable gross income (AGI) of $727 billion, paid an average 24 percent effective tax rate. If they had paid an average effective tax rate of 30 percent, as Obama is proposing, they would have paid about $218.1 billion in taxes that year, instead of $177.5 billion. That difference is a net gain of $40.6 billion in revenue.
However, that estimate does not account for the subset of millionaires who already pay above 30 percent, and would not contribute to that increased revenue. The IRS does not tabulate how many millionaires pay different effective tax rates. Therefore, it’s possible the revenue raised could be lower—but likely no less than $30 billion annually.
“There’s a lot of uncertainty about how much income is taxed above 30 percent already, and knowing that could really change the revenues,” said Roberton Williams, a senior fellow at the Tax Policy Center. “But there clearly is revenue to be had.”
Americans are supposed to pay a 35 percent tax rate on income earned over $388,350 under current law. But in reality, many high earners—including Republican presidential contender Mitt Romney — pay far less than that since most of their earnings come from investment income, which is taxed at 15 percent, rather than wages.
Although Obama did not offer details about his proposal, he did say Americans earning $1 million or more annually would pay at least 30 percent in taxes and would lose their ability to claim individual tax deductions for housing child care, retirement accounts, and health care. The White House also hasn’t laid out how it would define the $1 million in income that would trigger the 30 percent tax rate. It could be taxable income, cash income, gross income, or adjusted gross income.
“What Obama’s doing is really about optics and an impression of fairness and populism. It’s clearly not about revenue raising,” said Howard Gleckman, a senior fellow and tax expert at the Urban Institute.
But $30 billion isn’t exactly chump change. That would be enough to fund the National Institutes of Health budget in fiscal 2012 or the entire 2011 cost of the Pell grant program that helps low-income students pay for college. Another reference point: $30 billion is the approximate amount Americans spent during the 2011 holiday season.
But not all millionaires would contribute equally to this bigger revenue pot. Wealthy individuals who earn the majority of their income from investments, such as Mitt Romney, would shoulder the bulk of the increased tax liability. Romney paid an effective tax rate of 13.9 percent on his $21.6 million in income in 2010, according to his tax returns that were released this week. Had Obama’s 30 percent rate been in effect, his tax bill would have doubled from $3 million to $6.2 million.
Millionaires who earn the majority of their income through wages (and don’t have other ways of sheltering income) likely won’t see their taxes increase since many already pay more than 30 percent effective rates. Successful doctors, lawyers, professional athletes, and even Romney’s rival, former House Speaker Newt Gingrich, who paid an effective 32 percent tax rate on $3.16 million of joint income with his wife in 2010, would fit into this category.
Merrill Goozner contributed to this report.