How The Democrats’ New Millionaire Surtax Would Work

Democrats, scrambling to find a way to tax high-income households that Congress is willing to enact, appear to have settled on an individual income tax surtax. Their “millionaire’s surtax,” announced by President Biden this morning, would raise taxes on all forms of income, including wages, capital gains, and dividends.

It would impose a 5 percentage point surtax on adjusted gross income (AGI) between $10 million and $25 million and an additional 3 percentage points on income in excess of $25 million. The White House says the plan would raise $230 billion over 10 years.

The plan appears to largely track a bill first proposed in 2019 by Sen. Chris Van Hollen (D-MD) and Rep. Don Beyer (D-VA). One big difference: That bill would have set a 10 percentage point surtax on income in excess of $2 million.

How it would work

The Biden proposal would work like this: Someone with income between $10 million and $25 million would pay the ordinary 37 percent income tax rate for wages and salary plus the 5 percent surtax, for a combined rate of 42 percent. Long-term capital gains and most dividends would be taxed at 20 percent plus the 3.8 percent net investment income tax plus the 5 percent surtax, for a combined rate of 28.8 percent.

Because the tax is imposed on AGI, rather than taxable income, taxpayers would not be allowed to subtract the standard deduction or, more likely for this crowd, itemized deductions, from income subject to the surtax. 

On the cutting room floor

Biden and congressional Democrats came to this solution after rejecting a long list of alternatives. They included a top bracket rate increase,  taxing unrealized gains annually, a wealth tax, taxing unrealized capital gains at death, and ending the practice of stepped-up basis. Step-up allows decedents to pass on a lifetime of unrealized capital gains  to their heirs entirely exempt from capital gains tax.

Compared to other solutions, such as the billionaire income tax that emerged and sank over the past few days, the surtax  would be much simpler to administer. While it would require a few more calculations, it would be built on a familiar income tax base. Unlike the billionaire tax, there would be no years-long battles over the value of unsold assets.

Taxing income, not accumulated wealth

However, this proposal would do nothing to address the problem of unrealized capital gains, which represent most of the accumulated wealth of the very rich and have been a prime target of many progressive Democrats. Under current law, investment profits that never are realized during life go untaxed forever.

Biden’s plan also appears to target the very, very wealthy rather than just the mega-rich. Next year, about 30,000 tax filers are likely to make $10 million or more, according to TPC estimates. About 12,000 of them are expected to make at least $25 million. The billionaire levy would have taxed just a few hundred taxpayers.


Democrats landed on the surtax after Sen. Kyrsten Sinema (D-AZ) refused to back any bill that included income tax rate increases. The surtax doesn’t seem very different. But if it satisfies her and progressives are willing to impose a smaller tax bite on the wealthy than they’d like, it may be a key that helps unlock Biden’s Build Back Better agenda.     


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