Understanding the 70% Tax on Income Over $10 Million: Debunking the Myths

As we delve into the recent discussion surrounding the proposed 70% tax rate on income over $10 million, it is essential to clarify several misunderstandings. Many argue that the idea of imposing such a high tax rate is ridiculous, yet this assertion largely stems from a lack of knowledge about how the tax system works today and historical precedents. By exploring the nuances of the proposed tax and understanding the different sources of income that could push someone into the 10 million threshold, we can see that this is not as absurd as it might seem at first glance.

Is the 70% Tax Ridiculous?

Let's start by addressing the assertion that it would be ridiculous for anyone to make $10 million in income and still be subject to a 70% tax rate. In reality, the proposal is not as extreme as many believe. Here's why:

1. Passenger Economy
Only income over $10 million would be taxed at this higher rate. The 70% tax would apply only to the income that pushes someone's annual earnings above this $10 million threshold. The vast majority of people pay a far lower tax rate, with the tax brackets as follows:

$0 - $9,525: 10% $9,525 - $38,700: 12% $38,700 - $82,500: 22% $82,500 - $157,500: 24% $157,500 - $200,000: 32% $200,000 - $500,000: 35% Income over $500,000: 37%

2. Diverse Income Sources
When someone makes $10 million in a year, it is likely not all income from ordinary wages but could include a mix of ordinary income, capital gains, and lottery winnings. Here's a more detailed breakdown:

Ordinary Income: Some corporate executives and high-income professionals may earn this amount from salaries and bonuses. Capital Gains: For individuals who sell appreciated assets (e.g., stocks, businesses, houses, and farms), the capital gains tax would apply. In 2022, the capital gains tax rate is 20% (subject to certain adjustments). Lottery Winnings: Mega lottery winnings can easily push someone into the $10 million income range, but they are taxed at a standard income tax rate, not a capital gains tax rate.

The confusion often arises because many people mistakenly believe that the entire $10 million is taxed at 70%. In reality, the highest tax rates only apply to the portion of income that exceeds $500,000, with the 37% rate topping out at $500,000. For incomes above $500,000, the tax rate gradually increases until it reaches 39.6% for incomes over $1 million.

Historical Context

Historically, the United States has had high tax rates and lower thresholds. Back in the 1950s, the top tax rate was 90%, yet the economy grew tremendously and the U.S. became the most powerful economy on the planet. Even in the 1980s, when tax rates were still relatively high, the U.S. remained a robust economic powerhouse.

The idea of limiting incomes to prevent obscene amounts of wealth is not new. High tax rates have been used to ensure that the wealthy do not accumulate excessively large amounts of money, which can contribute to income inequality and economic instability.

Impact on Economic Growth

The proposal to impose a 70% tax on income over $10 million could have several unintended consequences:

Capital Invention: By capping the incentives for new business formation and investments, the proposal could hinder innovation and economic growth in the long term. Social Transformation: Some argue that such a tax hike could steer the U.S. towards a more socialist economic model, where wealth is redistributed in a more equitable manner. Educational Funding: State education funds that heavily depend on large lottery winnings could be affected. Without an exception for lottery winnings, mega lottery pots could be subject to this proposed tax, dampening interest in such lotteries and potentially leading to lower education funding.

It's crucial to understand that the 70% tax is not a blanket tax on $10 million of income but rather a targeted measure that applies to income above this threshold. This distinction is key to understanding the potential impact on economic growth and societal equity.

Conclusion

The proposal for a 70% tax on income over $10 million is not as ridiculous as it might seem. When analyzed in the context of current tax brackets and the sources of potential high-income earners, it is clear that the proposal is designed to ensure that the most affluent among us contribute more to the tax base. This is not a new concept but rather a reflection of historical precedents and the ongoing debate around income inequality and economic stability.

Understanding how the tax system works and the nuances of the proposed 70% tax can help us make more informed decisions regarding tax policy and its impact on economic growth and equity.