Interesting WP op-ed piece entitled "Five Myths About Millionaires" ran last Friday. The article makes a few points that often seem forgotten in popular discussions about the well-to-do. One key distinction is what does it mean to be a millionaire. Over a hundred years ago, it meant a net worth of $1m or more. Today, a person with net worth of $1m would do well to generate $40-50k of income from such an endowment. If this were to be used in any tax on millionaires, it would turn out to be a very broad-based tax.
The article does a good job of clearing up confusion on tax rates. Using a more proper definition of millionaire (annual income of $1m), these households pay 23 percent of their income in federal tax. As shown in a recent WSJ piece, those making between $100-200k pay 12.7 percent and those making $30-50k pay 7 percent. Economists rarely focus on these ratios of taxes paid to income, instead focusing on the marginal tax rate -- which is how much of an extra dollar earned gets taxed. Millionaires (like everyone else) pay vastly different marginal tax rates on capital gains (15 percent) and salaries (35 percent).
Would taxing millionaires help the economy? Although the Obama administration has advocated this course, my take is they know this would never get approved by either house of Congress. They must think it will play well with voters. Time will tell.
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