Tax the rich to pay for ... everything?
It's a politically easy thing to suggest since it's popular with the general public. But doing so may not achieve quite what lawmakers say it can.
By Jeanne Sahadi, CNNMoney.com senior writer
Last Updated: July 15, 2009: 7:11 AM ET
NEW YORK (CNNMoney.com) -- There may be reasons to tax the rich more, as a lot of people in Washington are talking about doing.
But to raise taxes on them, and only them, to pay for the country's most ambitious proposals like health care reform, is a problem, experts say.
If nothing else, it makes for some bad math.
"We don't have enough rich people. We could tax the wealthy to extraordinary levels. But we cannot afford everything we want," said Ken Kies, a former director of the Joint Committee on Taxation and currently a tax lobbyist for businesses including insurers.
Yet, rich households are the focus of several revenue generating proposals to help pay for health care reform and other endeavors.
Income surtax: Key committees in the House on Tuesday released a proposal that would impose an income surtax on high-income families -- an additional tax on income over a certain threshold.
The surtax applied in full would range from 1% to 2% for couples making between $350,000 and $500,000. It would range from 1.5% to 3% for couples making between $500,000 and $1 million. And it would be 5.4% for families making more than $1 million.
The Joint Committee on Taxation estimates the provision could raise $544 billion over 10 years.
Millionaire's tax: The Senate is said to be considering a "millionaire's tax" of 5% levied on single filers making more than $500,000 and joint filers making more than $1 million.
Deduction limit: President Obama has proposed limiting the value of itemized deductions for high-income taxpayers.
One idea under consideration in the Senate is to limit the mortgage interest deduction for the wealthy, although that idea is almost certain to face strong pushback from those with ties to the real estate industry, said Jaret Seiberg, the financial services policy analyst of the Washington Research Group, a unit of Concept Capital.
Expanded Medicare tax: Senate leaders are also considering applying the 1.45% Medicare tax paid by individuals to capital gains and dividends, and possibly also on income from properties and partnerships. Currently, the Medicare tax is only levied on earned income, such as wages.
Health care isn't the only big-ticket item driving the push to raise rates on the rich.
Obama has said he wants to make the tax system fairer and raise revenue by letting many of the 2001 and 2003 Bush tax cuts expire for high-income taxpayers.
He also wants to help pay for Social Security reform by subjecting more income to the Social Security tax. Currently, individuals' half of the payroll tax is 6.2% on the first $106,800 of wages. Under a proposal from Obama, people would also then pay between 1% to 2% on income over $250,000.
Finally, Obama has directed his tax reform panel to recommend ways to raise revenue but not increase taxes for families making less than $250,000. That suggests those at higher levels are fair game.
The problem with taxing only the rich
Some of the big ideas kicking around Washington these days may have merit and may be worth pursuing.
But they're not going to be enough if the goals are to enact new initiatives like health reform without adding to the deficit, and without taxing any family making less than $250,000, experts say.
"There's an argument for making the tax system more progressive," said Len Burman, director of the Tax Policy Center. "[But] people are going to have to pay tax or come to terms with smaller government. Right now there's enormous pressure for the government to do more and more."
And by not letting the Bush tax cuts expire for families making less than $250,000, the administration is forfeiting an estimated $2.1 trillion in revenue over 10 years.
Meanwhile, the federal debt held by the public is scheduled to rise from 41% of gross domestic product to 82% by 2019 under the president's proposed budget, according to the Congressional Budget Office. That already assumes the majority of Bush tax cuts expire for upper-income taxpayers.
At the same time, tax burdens across all income groups have been fairly low historically speaking.
Although they pay the lion's share of income tax dollars collected, high-income taxpayers benefited disproportionately from the Bush tax cuts.
But those same tax cuts also increased the ranks of those who end up owing no income tax - the majority of whom are not high income. The Tax Policy Center now estimates that after taking the tax breaks for which they're eligible, 47% of tax-filing households will have no federal income tax liability this year.
Many tax policy experts believe fundamental reform of the tax code -- a reform that simplifies the code and broadens the base of payers -- could be one step toward resolving long-term shortfalls.
Evasion is another concern experts raise when rates are hiked too high or too frequently. If high income taxpayers feel their tax burden too burdensome, they are more likely to seek out legitimate tax shelters. But also the higher rates go, Kies said, "the more it creates an atmosphere for cheating."
First Published: July 14, 2009: 5:53 PM ET
Here is a CNN video on the same subject, http://money.cnn.com/video/news/2009/07/21/n_health_tax_rich.cnnmoney/