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The Millionaire Tax Explained

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Millionaire ReceiptObama has spent the latter half of his first term with a more populist tone. Some believe that Tea Party pressure as well as the Occupy Wall Street movement have brought the country’s attention to the reported 1%, the country’s wealthiest people. As Obama tries to appeal to the other 99%, he has taken on the idea of the Buffett Tax.

Warren Buffett, in a now well known New York Times Op Ed Piece believes that he and other high net worth people like him, should pay more tax than current laws require. He says that his 15% tax rate is lower than his secretary’s tax rate.

At the 2012 State of the Union address President Obama invited Buffett’s secretary to the speech where he again mentioned the Buffett rule which he now calls the Millionaire Tax. He laid out some bold plans for making the nation’s wealthiest Americans pay more in taxes.

The Details

The Millionaire tax would set a flat 30% tax rate for anybody making more than $1 million annually. He also called for an end to deductions for millionaires on health care, retirement, child care, and home expenses in order to keep the 30% tax rate more difficult to circumvent. With nearly 25% of all millionaires not paying enough to satisfy the proposed Millionaire Tax, this is surely not going to sit well with some of the nation’s wealthy although some, like hedge fund manager George Soros believe the plan to be fair.

Alternative Minimum Tax

The Alternative Minimum Tax or AMT was supposed to be the answer to this problem. When it was originally enacted, it was designed to force high income households to pay a minimum tax rate but as time went on and the law was not adjusted for inflation, an increasing amount of middle class households were forced to pay the tax. More than 4% of individual taxpayers now pay the AMT with 27% of those having gross incomes under $200,000.

Congress has enacted numerous short term fixes for the AMT but they haven’t taken up a permanent fix. In this Huffington Post article, the author believes that the reason Congress doesn’t permanently fix the law is because it would make deficit projections look a lot larger when a large portion of the AMT revenue were taken away.

Obama’s new Millionaire Tax isn’t new. It would modernize the AMT tax rules and allow Congress to permanently fix the problems with the current alternative minimum tax although there has been no mention of taking up a permanent fix of this law in conjunction with the new Millionaire Tax.

Pushback

Because the AMT has been talked about in conjunction with the Millionaire Tax, some tax experts believe that it will add further confusion to the already complicated tax code. Currently, millionaires, and many middle income earners have to figure their taxes two different ways but if the Millionaire Tax were to go in to effect, this could require those making more than $1 million to complete their taxes three different ways. This, according to Roberton Williams, a senior fellow at the Tax Policy Center, is just further complication.

Warren Buffett has found a surprisingly large amount of support for his ideas but for every one high net worth individual in support of the idea, there are others, who aren’t as wealthy as Warren Buffett who don’t support the rule. Some believe that Obama is waging class warfare but for the majority of Americans who earn far less than $1 million annually applaud the proposed Millionaire Tax.

(Photo: johnnyvulkan)

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22 Responses to “The Millionaire Tax Explained”

  1. To re-channel P.J. O’Rourke: “Higher tax receipts only encourages the bastards in Congress to continue spending beyond their means.” Buffett’s Millionaire Tax has been debunked in numerous places. It’s just a bad idea that fails to address the root cause of the nation’s financial problems. I wish he would concentrate on running Berkshire Hathaway. Government is greedy enough already; let them go on a diet for a change.

    • Karen says:

      I cringe when class warfare is used. Most people don’t know enough history to realize that every time the rich have been taxed in the name of “paying their fair share”, the next generation of middle class folks are paying that tax. You are absolutely right, the solution is for government to go on a diet. Hey, here’s a novel idea from Newt: “how about shrinking government to the size of the money they take in, instead of increasing the money they take to the size of government.”

  2. Courtney says:

    If the tax is on income over $1M, I don’t see why you have to compute your taxes three ways. You get to your AGI, and if it’s over $1M you stop and pay 30%. What am I missing here?

    • shckr7 says:

      AMT can be higher than 30%……

      • Courtney says:

        Not according to what I just read – the AMT rates are 26% and 28% and you still have certain deductions (albeit possibly at a reduced level). But the point is that with AMT versus regular tax, those who might be subject to the AMT have to calculate their taxes both ways because AMT is triggered if it’s higher than your standard tax bill. If this new tax goes into affect, it’s triggered earlier in the tax computation process, you stop figuring both your regular tax AND any possible AMT and you pay the flat rate.

        I’m not arguing for or against it on any financial merits, but I don’t see how it makes the process more complicated.

        • shckr says:

          You are right, Courtney. I was thinking that it followed regular tax rates, but did not let you take certain deductions.

          So, if they pass this and get all of the deductions taken out, like Jim notes above, you are correct – should just pay the 30% and not need to calculate taxes multiple times.

          If for some reason they go thru and make the deductions different for AMT compared to Millionaire’s Tax, then you may need to calculate both ways depending on your deductions…. Hopefully, they don’t complicate this. Ideally, (in my mind) they would do away with AMT, but I don’t think that is likely. Call me a cynic but I don’t believe this tax bill is as much about “fairness” as it is about getting more money, and getting rid of AMT does not serve the government well, in that regard.

  3. Evan says:

    I actually wondered why it wasn’t sold as a fix for amt versus a millionaire’s tax?

    • Strebkr says:

      Agree. I’m getting closer and closer to AMT and I would rather it go away in favor of something else. As long as that something else is much higher AND adjusted for inflation every year.

  4. rlaw100 says:

    I think a bigger issue is the fact that most millionaire’s have a significant portion of their income coming from qualified dividend and long term capital gains. Thus the 15% tax bracket for millionaires.

    If you take this away, the tiered tax system we already have should be sufficient, but of course their are tons of problems with getting rid of this.

    • Shckr7 says:

      I like this idea a lot. My only caveat, is I think that corporations should pay 0% taxes on earnings that they pay out in the form of dividends.

      This would help retired lower wage earners who potentially rely on dividends for a portion of their income (they would get more), and for people making >$1M/yr in dividends, their tax rate would be much higher than 30%…..

  5. Jason says:

    This is a con and continues to be. Simple fact is that our tax structure is already progressive. The more you make, the more you pay in taxes. Even if buffet paid 1% in taxes im sure he would pay way more then any of us in total dollar amount. Please tell me why in the world we continue to ask the “winners” of this country to continue to pay even MORE of their fair share. We are simply pushing them away. Reduced taxes on dividend earnings is nothing new. Big government tries to use taxes as levers to stimulate growth in the “industry of the day”. So some time back goverment decided they wanted dollars pumped into the stock market, so what did they do? Lowered the taxes on that arena. Why are we now punishing those people who took advantage? Its almost as insane as Obama bailing out the auto industry and then punishing those who buy cars by increasing fuel tax and regulation…oh wait…he already did that!

  6. Sinjin says:

    Income only should be taxed, any income and from any source (income is income).

    The rate of that taxation should be relative to the the income. The more you make the more you pay.

    The person enjoying the most income pays the most, the person not enjoying much of an income should pay the least.

    It ain’t class warfare, it is simply fair.

    • Jessica says:

      It already is relative to income when you use percentages. If everyone pays the same % the people making less pay less and the people making more pay more. 10% of 10,000 is $1,000. 10% of 100,000 is $10,000, which sure does seem like a whole lot more than 1,000 to me… exactly 10x more.

      We go further than that though, higher percentages for higher incomes. As a relatively high income earner, I’m okay with that. I consider it my charitable contributions for the year and you will never hear me complain about paying my taxes or how unfair it is because, frankly, I have everything I need and I’m very happy with my life. I will, however, point out the flaws in the arguments of others who pay MUCH less than I do and still find some way to complain about how unfair it is that they had to pay $500 in taxes this year. People just don’t know how good they have it (and I’m not suggesting that paying fewer taxes because you have a low income means you have it good. I REALLY think people in this country just have no concept of what being poor really means).

    • DonC says:

      All income is not the same. You are over simplifying things. Capital gains are taxed at a lower rate as a means to give incentive to those willing to risk their money in hopes of turning a profit. they risk losing all of their money and have no profit. generating capaital gains is riskier than earning wages. there has to be an incentive. otherwise, people would not put their money at risk.

      • Courtney says:

        I and several other people addressed this in the last heavily commented thread about taxes. The lower capital gains tax rate is only about 10-15 years old. It was 20-30% before that, and was lowered twice under our previous two presidents – once in 1997 that lowered the capital gains tax from 30% to 21% in exchange for expanding the EITC, and once in 2003 that further lowered it to 15% as part of the 2003 tax reform bill that should have expired along with the rest of the Bush tax credits in 2010.

        It has nothing to do with adding incentive to investment, and everything to do with politics. It was at or near 30% during the boom of the 90s and somehow investments still thrived and people still made money.

    • David R says:

      Obviously you have no idea what you are talking. That’s why obama can get away. Go read some books. It’s not that difficult.

      The dividend income is totally different from the salary income because before company pays dividend, the company already paid corporate income tax. Then the dividend income has to pay 15% tax. So the dividend income is actually double taxed. Adding corporate income tax and 15% dividend income tax, the dividend income tax rate is actually higher than salary income tax.

  7. Dj Hams says:

    I wish that was my bank receipt!

    • govenar says:

      It seems kinda silly for someone to have that much money in a checking account though. (But maybe they’re rich enough that they don’t even care about earning interest or having FDIC insurance.)

  8. freeby50 says:

    “More than 4% of individual taxpayers now pay the AMT”

    The article linked to says that 142 million people filed tax returns and 3.9 million had AMT tax liability. Thats 2.7% of the filers.

  9. David Taylor says:

    How does someone like Mitt Romney or Warren Buffet earn massive amounts of income and not run into the 28% Alternative Minimum Tax Rate?
    How do they get their overall tax rate down below 14% without paying it all back as Alternative Minimum Taxes? What is their type of income which is exempt from Alternative Minimum Tax?


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