WASHINGTON—What if you paid a higher percentage of your income in taxes than average American workers? That’s what the Democrats are planning to do in the House and Senate if they win control of Congress this November.
Among their many tax plans are proposals to raise the tax rates on individuals making more than $1 million a year and couples earning more than $2 million.
According to the Tax Policy Center, most taxpayers would pay more under the House and Senate Democrats’ tax proposals. But so would wealthy Americans, many of whom would pay less because their tax rate would increase. For example, an individual earning $100,000 a year, would end up paying more taxes under Democratic plans but an individual making $1 million a year would end up paying less.
The big question is whether any of the tax increases would force wealthy taxpayers to change their behavior in order to pay less in taxes. Tax analysts say there is little that could be done by a wealthy person to pay less. The bulk of money that wealthy taxpayers pay in federal taxes comes in the form of dividends, capital gains and Social Security and Medicare payroll taxes.
But under the House and Senate Democrats’ plans, a prosperous multimillionaire would have to pay more in taxes in order to make up the difference with lower effective rates on his income. In short, the rich would pay more and pay less, says Larry Sabato, who teaches government at the University of Virginia. “The ultimate game plan by the Democrats is to get some kind of revenue without raising taxes on the wealthy,” Sabato says.
The Democrats have a tax history of working with a small segment of millionaires to raise taxes on the rest of the country. So far, efforts to raise taxes on individuals earning more than $1 million have gone nowhere in the Senate. And the D.C. court of appeals in 2009 ruled that, under the Tax Code, individuals making more than $1 million cannot be taxed at rates that are higher than those paid by most Americans.
The Tax Policy Center says Americans earning $1 million or more would see their average tax rate fall from about 31 percent in 2013 to 28 percent in 2018. Someone earning $100,000 would pay 33 percent of their income in taxes in 2014 if those rates were in effect. By 2018, that percentage would rise to 35 percent. On average, Americans earning more than $1 million would pay 35 percent of their income in taxes in 2018, down from 37 percent in 2013.
The Democrats’ tax proposals would also widen the tax gap between rich and poor. While taxpayers who earn more than $1 million would pay a larger share of their income in taxes, the Democrats argue the vast majority of Americans who earn more than $1 million are in the top 20 percent of earners, which has the highest income tax rates.
The Democratic tax plans would lower the percentage of money that wealthy taxpayers owe in taxes from about 39 percent to 38 percent. The Democrats note that millions of middle-class Americans pay more, as the percentage of their income in taxes, because of their modest incomes. If lower taxes for middle-class people were a goal, they note, the Democrats’ tax increases would double the proportion of income that is covered by taxes paid by Americans earning between $50,000 and $100,000.
But as Republican candidates have been pointing out for years, most Americans don’t pay taxes. According to the Tax Policy Center, more than three-quarters of Americans do not pay federal income taxes or have federal taxes withheld from their paychecks. And only one in every 10 Americans has federal income taxes withheld from their paychecks. The vast majority have their taxes withheld from their wages, to conform to the tax code.
The distribution of taxes paid by Americans differs depending on income. According to the Tax Policy Center, almost three-quarters of Americans earn less than $150,000 a year and the remainder earned between $150,000 and $500,000. However, those who earn between $500,000 and $1 million pay nearly three times as much in federal income taxes as those who earn less than $500,000.
About 57 percent of Americans pay no federal income taxes. That number includes a sizable chunk of taxpayers who pay no federal income taxes. Those taxpayers are primarily business owners who take their businesses out of the IRS’ jurisdiction and lower their taxes by reporting their business profits and losses through an individual income tax form.