What’s That ‘Surtax’ Doing in Build Back Better?

Sales tax. Property tax. Income tax. We all know what these three familiar taxes tax. But what does a “surtax” do? What difference, in particular, is the Build Back Better “surtax” that just passed the House of Representatives going to make?

Maybe a big difference. In fact, if the Senate follows the House lead, the new Build Back Better surtax might just turn out to be a giant first tax step toward the more equal America that we all so desperately need.

A “surtax” — at its most basic —simply amounts to a tax added onto an existing tax. The Build Back Better surtax builds upon existing income tax rates. Couples filing jointly, under our current system, will face a 37 percent tax on income over $647,850 in 2022. The Build Back Better doesn’t change that rate. But Build Back Better does add a surcharge that will impact households making over $10 million.

These exceedingly affluent households would face a 5 percentage-point additional tax — the surtax — on income over $10 million and another 3 percentage-point tax on income over $25 million. The first dollar of income over that $25 million, in other words, would face a 45 percent tax if the Senate gives Build Back Better a green light.

But the difference the Build Back Better surtax would make goes beyond these percentages. The surtax also reduces the highly preferential treatment that our U.S. tax code has been giving to the categories of income that go overwhelmingly to our most affluent.

Under current law, our wealthy only face the 37 percent top federal income tax rate on the income they make from the work they do. Their income from investments and the capital gains they realize from buying and selling stocks and other assets face only a 20 percent tax, plus an additional 3.8 percent “net investment income tax” for Medicare. Build Back Better will apply the 5 and 3 percent surtaxes to both income from work and income from capital.

Even better, Build Back Better applies the surtax to income over $10 million before deductions, what the IRS calls “adjusted gross income.” Many of those oh-so-clever loopholes that the rich and their pals have inserted into the tax code over the years would be, as a result, less rewarding in a Build Back Better America.

Could America’s rich game the new Build Back Better surtax? In certain situations, note Center for Budget and Policy Priorities tax analysts Chuck Marr and Samantha Jacoby, they could. A deep pocket who stands to gain $50 million by selling off an appreciated stock could, for instance, “sell the stock evenly over six years to stay under the $10 million threshold and avoid the surtax.”

But our super rich who take in huge amounts of annual compensation from their day job will have a much harder job playing that game. And that reality means, tax advisers for the wealthy point out, that “highly compensated corporate executives” will be among those most likely to feel the biggest Build Back Better tax squeeze.

How big a squeeze? Since 2016, Bloomberg has reported, the number of top corporate execs making over $25 million a year has quadrupled. In 2020, at least 15 corporate CEOs pocketed over $100 million in annual compensation.

Billionaire Elon Musk led that 2020 list, after pulling down an astounding $6.6 billion in rewards from Tesla. If the Build Back Better surtax had been in effect, Musk’s federal tax bill on his Tesla earnings could have been as much as $532 million higher.

The next nine highest-paid CEOs in 2020 averaged $376.1 million. Their individual federal income tax bills could have been an average $34.8 million higher if the Build Back Better surtax had been the law of the land last year.

The Biden administration expects that the Build Back Better surtax on income over $10 million will, overall, raise some $230 billion over the next ten years. And that number could well rise in future years as advocates for a “millionaires surtax” continue their campaign for a 10-percent surtax on annual income over $2 million, a levy that would essentially only impact America’s most affluent 0.2 percent.

Senator Chris Van Hollen of Maryland and Representative Don Beyer of Virginia have already introduced legislation along that line, and over 70 national organizations ranging from the AFL-CIO to the National Organization for Women have now endorsed their proposal.

The public likes the idea of a stiffer surtax, too. A Hart Research Associates poll has found that 73 percent of American voters would support a 10 percent surtax that kicks in at $2 million in annual income. Even 53 percent of Republicans would approve of a surtax along those lines.

The Build Back Better surtax might even inspire a wave of other surtax proposals that take aim at grand private fortune. That wave is already starting to build. Earlier this year, the president of the Miami-based Community Development Fund, Kenneth Thomas, called for a “1-percent surtax on non-resident One Percenters buying real estate valued at $1 million.” The proceeds from that surtax, he explained in the Miami Herald, would “go into a government affordable-housing fund.”

“A Wall Streeter moving to Miami making a half a million dollars or more annually,” added Thomas, a long-time Wharton business school economist, “should not mind a $10,000 surtax on a new million-dollar condo on the water.”

Those deep pockets who would mind are clearly suffering from an ailment one American of substantial means, Alan Davis, has labeled “Excessive Wealth Disorder.” The best way to treat that disorder? Davis, an activist with Patriotic Millionaires, prescribes a stiff surtax that tracks the Van Hollen-Beyer legislation reintroduced in Congress this past June. We need, says Davis, to start “fixing the unprecedented concentration of wealth and power in my wealthy cohorts that is slowly killing this country.”

The Build Back Better surtax would help us start that fixing.

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What’s That ‘Surtax’ Doing in Build Back Better?