Think Progress

by Faiz Shakir, Amanda Terkel, Matt Corley, Benjamin Armbruster, Ryan Powers, Nate Carlile, and Pat Garofalo

The Case For A Surtax

As part of its health care legislation, the House Ways and Means Committee has proposed implementing a tax surcharge on the richest one percent of Americans, with the revenue going toward financing a portion of the estimated $1 trillion cost for health care reform. Under the House proposal, the surtax would begin in 2011 and constitute a one percent marginal rate for households making between $350,000 and $500,000, 1.5 percent for households making $500,000 to $1 million, and 5.4 percent for those making more than $1 million. As House Speaker Nancy Pelosi (D-CA) put it, "Let's leapfrog over the middle class to the wealthiest people in our country. They've had it pretty good the last eight years in terms of tax policy under President Bush. And we think that's a place you can go." Yesterday, Secretary of Health and Human Services Kathleen Sebelius called the tax "a legitimate way to go forward." And as Families USA executive director Ron Pollack said, "Since this group enjoyed a significant tax reduction windfall during the last decade -- and since this windfall played a big role in burgeoning federal deficits -- it makes sense that this group bears some burden as part of the effort to secure America's long-term economic future through health-care reform."

RECOVERING FROM THE BUSH TAX CUTS: As House Ways and Means Committee Chairman Charles Rangel (D-NY) explained, "This is a tax on less than 1 percent of the wealthiest people in the United States of America." According to estimates from Citizens for Tax Justice (CTJ), 98.7 percent of Americans will be totally unaffected by the surcharge. And the roughly one percent of Americans that will see their taxes increase under the surcharge have benefited from years of skyrocketing income and a falling effective tax rate. Between 1979 and 2006, the inflation-adjusted after-tax income of the top 1 percent of households increased by 256 percent, compared to 21 percent for families in the middle income quintile. Meanwhile, over the ten year window from 2001-2010, the Bush tax cuts gave the richest one percent of Americans about $715 billion in tax breaks. This comes out to about $518,000 per household over ten years or about $51,800 per year. The surcharge, meanwhile, would raise $544 billion from those same households over 10 years. So as CTJ pointed out, the surcharge "would require the richest one percent to give back some, but not all, of the tax cuts they received over the 2001-2010 period." "It certainly is okay for me to tell my friends on Wall Street, who just got a bonus of $600,000, that they're going to pay more in taxes so that we can lower health care costs in America," Sen. Bernie Sanders (I-VT) said.

SURCHARGE WON'T AFFECT SMALL BUSINESSES: A favorite conservative claim is that any tax increase on the top one percent will disproportionately affect small businesses. "Half of those people [who would have to pay the tax] derive their income from small businesses, half of those people are making the decision about whether to hire Americans or not," said Rep. Eric Cantor (R-VA). But according to both the Joint Tax Committee on Taxation and the Tax Policy Center, "96 percent of taxpayers with business income would not owe the surcharge." Furthermore, the Center on Budget and Policy Priorities pointed out that "the 4 percent of remaining 'small businesses' affected by the surcharge include taxpayers that stretch the definition of the term, including partners in large law and accounting firms and investors who have stakes in Wall Street investment partnerships." Due to the stimulus package that Congress passed in February, small businesses are actually receiving tax breaks, and as Rangel said, in the House's health care legislation, "we exempt small business from a lot of the penalties. We give tax credits so that they're able to hire and get people healthcare in small businesses."

A 'NON-STARTER' IN THE SENATE?: The surcharge has met with stiff resistance in the Senate, with Sen. Ben Nelson (D-NE) calling it a "non-starter," while Sen. Chuck Grassley (R-IA) said it was "non-negotiable" and Sen. Olympia Snowe (R-ME) called it one of the "less viable" funding mechanisms under consideration. The Senate is reportedly considering a variety of alternative ways to raise revenue, including capping employee health benefits. Options that would also raise revenue from the richest Americans include limiting itemized deductions to 28 percent (instead of the current 35 percent) for those in the top tax brackets or applying the Medicare tax to capital gains and other non-wage income, both of which would have the advantage of addressing already existing inequities in the tax code. In an interview with Politico, Pelosi said that she wants to "soften" the surcharge "so that it applies only to families that make $1 million or more," adding, "I'd like it to go higher than it is." 

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I'll take George Bush's deficit right now of a trillion dollars over the 10 trillion dollars that this administration has created in just six months."
-- RNC Chairman Michael Steele, 7/17/09

VERSUS

"The U.S. budget deficit topped $1 trillion for the first nine months of the fiscal year."
-- Bloomberg News, 7/13/09