Economy

Explaining Hillary Clinton’s New Millionaire ‘Surcharge’

CREDIT: AP Photo/John Locher

Hillary Clinton called for a new “fair share surcharge” tax of 4 percent on multi-millionaires Tuesday, making the proposal a centerpiece of her official tax plan.

The rest of Clinton’s tax plan is built on more familiar ground. She wants to raise capital gains taxes on short-term investment earnings, end the carried-interest loophole and other deductions the wealthy use to drive their actual tax rates far below the statutory rates for their earnings levels, and charge higher estate taxes against a larger number of inheritances than current law, which exempts all hand-me-downs smaller than $5.45 million. In total, the campaign says Clinton’s plan would bring in $400 to $500 billion in new revenue over a decade.

About a third of that new money would come from the fair share surcharge.

The luxury surtax would apply to the first dollar a person earns after $5 million and every additional penny beyond that. It would not discriminate between capital gains income and payroll earnings as the standard income tax system does. The surcharge policy appears to be modeled on a French tax that kicks in at a far lower income threshold. Taxpayers in France are charged an extra 4 percent there on earnings above $542,000 per year, and those earning between a quarter- and half-million euro per year pay an additional 3 percent.

The Clinton campaign predicts her version of the levy would raise $150 billion in new revenue over a decade, or $15 billion each year on average – adding about one percent to the $1.5 trillion in individual income tax revenue collected federally in 2015. Of every 10,000 taxpayers, the campaign said, exactly two earn enough to trigger the extra charge. The estate tax changes would be similarly limited in scope, affecting only the 0.4 percent of all inheritances that exceed $3.5 million, but Tuesday’s plan also pledges to end the system of workarounds the hyper-rich use to duck the estate tax today.

The surcharge would be separate from the bracketed levies of the standard income tax system – and thus helps illustrate the central contrast between Clinton and Sanders on how to use the tax code to finance large public investments.

Clinton appears poised to leave the top marginal income tax rate at the current 39.6 percent, which kicks in on earnings above $413,000 for an individual filer and about $465,000 for a married couple. Clinton has said she will not tax an extra dime from anyone earning less than $250,000 a year. That means asking nothing further of a set of people who are in the top 5 percent of all earners in America, cutting off a significant potential source of higher revenue to support investments in childcare, pre-school, and other policies she favors for working families.

Clinton’s plan instead focuses on a different set of policy tactics to raise those funds. Key among them is the so-called “Buffett rule,” a bright-line minimum under which people earning over $1 million a year are not allowed to pay a tax rate below 30 percent even if deductions, loopholes, and slick accounting would make it feasible to pay a more Romney-esque rate.

Sanders, meanwhile, favors an approach built around raising rates. While the Vermont senator has yet to reveal his official tax platform for the campaign, he has repeatedly noted that the present 39.6 percent top rate is far more generous to the hyper-rich than American law has been historically and signaled a desire to add new tiers to the top of the tax brackets and assess far higher rates on the ultra-wealthy. Last June he introduced an estate tax proposal that uses the same $3.5 million floor and 45 percent rate Clinton proposes as its base, but also adds new brackets with higher rates for inheritances larger than $10 million. And he’s also signaled a willingness to tax working people at a microscopic rate in order to finance paid family and sick leave policies. Clinton characterizes that proposal as a tax hike for the middle class and the poor, while Sanders views paid leave as an earned workplace benefit like Social Security and unemployment insurance that should be funded through payroll taxes.

Sanders has promised to unveil a full tax platform before the Iowa caucuses begin in February. Direct comparisons between the two Democratic contenders will be simpler once he does. But the information already available points to a difference in philosophy more than a difference in mathematics. Both candidates are looking to soak the richest Americans in order to pay for investments in everyone else’s wellbeing, but seek different degrees and forms of sacrifice. Both want to break Wall Street’s hold on the economy and political system, with Clinton arguing that can be achieved through modest changes to tax and other policy and Sanders seeking to break up the banks. And both want to boost working families’ economic security through policies that are commonplace in almost every other developed country, but disagree about whether or not those same families should chip in to the cost of universal childcare, preschool, and paid leave systems.