Center for American Progress

The Millionaire Surcharge Would Improve the Fairness of the Tax Code

The Millionaire Surcharge Would Improve the Fairness of the Tax Code

Special carveouts are unwarranted and would create new ways for the ultrawealthy to game the system.

People walk under Wall Street street sign
People walk by the New York Stock Exchange in the Financial District on January 26, 2022, in New York City. (Getty/Spencer Platt)

The millionaire surcharge included in the House-passed version of the fiscal year 2022 budget reconciliation bill would raise revenue while addressing widening inequality by imposing a 5 percent surcharge on the incomes of the wealthiest U.S. households—those with incomes above $10 million—along with an additional 3 percent levy on incomes in excess of $25 million. The surcharge would raise an estimated $228 billion over the next decade. Only the highest-income 0.02 percent of U.S. households, approximately 22,000, would pay this surcharge.  Congress should enact the surcharge as part of a reconciliation bill along with other high-priority revenue items such as the international corporate tax reforms and the funding needed to rebuild the Internal Revenue Service.

One of the most important attributes of the surcharge is that it would apply to all forms of taxable income because it is based on adjusted gross income (AGI). And the multimillionaires subject to the tax could not use tax preferences such as below-the-line deductions or tax credits to reduce what they would owe. Members of Congress have reportedly discussed exempting certain forms of income from the surcharge. By doing that, however, Congress would exclude not just some but most of the income received by multimillionaires. Congress should enact the surcharge without special exclusions that would slash the amount of revenue raised, privilege income from wealth compared with that from work, and encourage high-income households to game the tax code in order to avoid the surcharge.

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Special tax preferences have helped fuel widening wealth inequality

Recent decades have been marked by a dramatic rise in the incomes of the richest U.S. households, as well as much slower growth for those in the middle and bottom of the earnings distribution. An unprecedented level of wealth inequality has emerged over the same period. These disparities have continued during the COVID-19 pandemic, with the wealth of U.S. billionaires rising by more than $1 trillion in 2021 alone.

Figure 1

Policy decisions that provide special tax preferences for investment income, along with loopholes that allow the wealthy to avoid ever paying taxes on accumulated wealth, have contributed to widening disparities. Most notably:

  • The tax code does not treat increased asset values as income unless and until an asset is sold, allowing the wealthy to amass huge fortunes without reporting income on their tax returns. (see Figure 2)
  • When an asset is sold, the capital gains—the profit earned from selling assets such as corporate stock, ownership interest in a business, or real estate—are taxed at a special low rate if the asset has been held for longer than a year.
  • Finally, stepped-up basis allows the wealthy to entirely avoid taxes on the increased value of assets they pass on to their heirs.

Figure 2

Wage-earning Americans, by contrast, have taxes withheld from their paychecks before they receive them, meaning they pay taxes on their income, at standard tax rates, at the time it is earned. The 2017 Tax Cuts and Jobs Act (TCJA) worsened these trends by providing massive tax cuts that disproportionately benefited the wealthy. The act provided millionaires with an average tax cut of $69,840 per year—nearly 77 times the $910 reduction received by the middle one-fifth of households.

Also contributing to widening inequality is the large and rising share of the earnings of the wealthiest 1 percent of households attributable to business income that is not subject to corporate taxes. The profits of partnerships, limited liability companies, S corporations, and sole proprietorships—collectively referred to as pass-through entities—are not taxed federally at the entity level. Instead, owners pay taxes on the profits they receive through the individual income tax.

Pass-through businesses have long received special treatment in the tax code

Pass-through income has skyrocketed in recent decades. From 1979 to 2018, total business income received by the top 1 percent of households rose by 600 percent; in contrast, labor income increased by 247 percent, and that from capital gains and other capital income—which accounts for the largest fraction of income received by the top 1 percent—rose by 164 percent. Researchers note that a substantial fraction of the rise in business incomes occurred because “pass-through owner-managers pay themselves less in wages and more in profits for tax purposes.”

Pass-through business income is also highly concentrated at the top of the earnings distribution. In 2018, the wealthiest households—those in the top 1 percent of the earnings distribution—reported, on average, 227 times as much business income as middle-income households. Households in the top 1 percent of the earnings distribution, for example, received approximately 70 percent of partnership income—and are more than 50 times more likely to receive partnership income than those in the bottom half of the distribution. Most of the partnership income received by the top 1 percent, those most likely to pay the proposed millionaire surcharge, derives from finance and professional services. Research finds that this income “is, on average, taxed at preferred rates.” Among the factors contributing to these relatively low rates is the large share of partnership income—45 percent—paid as capital gains and dividends.

Figure 3

Special tax breaks for business income, including those in the TCJA, have fueled the growth in business income by incentivizing high-income earners to recharacterize wages as profit distributions. These recharacterizations represent the form in which earnings are reported for tax purposes, not the content of the work performed, and undermine the fairness of the tax code, putting wage-earning Americans at a disadvantage. As reported by the Congressional Budget Office, owners of pass-through businesses have disproportionately benefited from the TCJA’s tax cuts, with the largest reductions going to households in the 99.90th to 99.99th percentile of the earnings distribution. The TCJA provided a deduction equal to 20 percent of certain income from pass-through businesses.

Lowering the tax rate on business income relative to the tax rate on work creates a loophole that encourages taxpayers to reduce the taxes they owe by converting labor income into pass-through business income. Such opportunities for gaming the tax system are not merely hypothetical. Press reports document how some of the nation’s wealthiest families—including some that actively lobbied for the new loophole—saved millions of dollars. In 2018 alone, the wealthiest 1 percent received nearly 60 percent of the benefits—$24.8 billion—from the pass-through tax break.

Figure 4

A special carveout for pass-through income would slash revenue from the millionaire surcharge

Pass-through industry lobbyists have argued for a special carveout, or exclusion, of business income that would favor the wealthiest households and slash the revenue raised by the surcharge. Research cited by industry sources estimates that revenues would be cut by $106 billion—nearly half—if pass-through income were exempted from the surcharge. The actual loss would likely be even greater, since many wealthy people undoubtedly would find ways to recharacterize as much of their income as they could as pass-through business profits to take advantage of the special exemption.

Opponents’ claims that the surcharge will harm small business are grossly exaggerated. While small businesses account for the largest number of pass-through entities in the United States, many of these firms are “mom and pop”-type businesses that struggle to make ends meet. Few people who own pass-through businesses or hold interests in pass-through entities have incomes exceeding the $10 million threshold for the surcharge. In 2020, just 0.02 percent of returns with business income met the surcharge’s $10 million threshold; 77 percent reported adjusted gross income (AGI) of less than $100,000. Moreover, if the surcharge were enacted, multimillionaire pass-through business owners and investors, along with all other multimillionaires, would only pay tax on the part of their incomes that exceeded $10 million. The owner of a pass-through business whose income consists of $15 million in profits, for example, would only pay the 5 percent surcharge on $5 million of their income.

Figure 5

Because the surcharge would apply to individual owners of pass-through businesses, not the firm as an entity, it would only affect a small handful of the wealthiest households. Major beneficiaries of a special carveout would include ultrawealthy people in the financial sector and in professional services, such as the very richest partners in law, consulting, and accounting firms, which receive the vast majority of all partnership income. Researchers note:

Of the 69.0 percent of partnership income that accrues to top-1 percent households, 36.6 of those percentage points accrue from partnerships in the finance and holding company industry and another 16.0 accrue from partnerships in the professional services industry … Taking into account all AGI percentiles, nearly half (48.7 percent) of partnership income earned by individuals accrues from partnerships engaged in finance and company holding—much of which is portfolio income taxed at preferred rates.

Exemptions for pass-through income and capital gains would supercharge benefits for the wealthy and worsen tax avoidance

Exempting pass-through income and capital gains from the millionaire surcharge, on top of the preferences already embedded in the tax code, would supercharge the incentives for tax avoidance.

Consider the following:

  • The carried interest loophole will be even more lucrative for private equity fund managers and other financial professionals. Under existing law, ultrarich managers of private equity funds and other types of investment funds exploit the carried interest loophole in order to pay preferential tax rates. They do this by structuring their compensation as profits from the funds they manage, which they then claim should be treated as capital gains and therefore subject to preferential tax rates—lowering their tax rate on that income by as much as 17 percentage points, the difference between the top tax rate applied to wage income and the lower rate for capital gains. If capital gains are carved out of the surcharge, the carried interest loophole becomes even more lucrative because the top tax rate for capital gains would be 25 percentage points lower than that for ordinary income. An exemption for capital gains would cut the taxes of a private equity fund manager with an income of $100 million per year, half of which is carried interest, by $4 million per year in addition to the $8.5 million per year benefit the manager already receives due to the lower tax rate on capital gains. Even if capital gains are included in the surcharge but pass-through business income is excluded, financial professionals could potentially avoid the surcharge by structuring as much income as possible as business profit rather than salary.
  • To avoid the surcharge, CEOs of large pass-through businesses could arrange their compensation to recharacterize some or all of their salary as profits from the business. According to reports, after the passage of the TCJA, some very highly paid executives of pass-through companies suddenly reduced their own salaries dramatically. They did not actually reduce their multimillion-dollar incomes, but rather converted them into business profits that were eligible for the special pass-through deduction. That effectively reduced the top tax rate on such income by about 10 percentage points. If business profits are excluded from the surcharge, the same type of executives could cut their tax rates by as much as 18 percentage points. That would undoubtedly encourage many more CEOs to use such tax-dodging maneuvers. The proposed exemption would allow a CEO to reduce his taxes by $2 million if he were to shift half of his $50 million annual pay from wages to business income.
  • Super-rich athletes, artists, and media personalities could avoid the surcharge by funneling their income through business entities. Wealthy celebrities largely receive income from many sources other than salaries, such as recording sales, merchandising, promotions, and event appearances. If the surcharge applies to salaries and other ordinary income but not business profits, celebrities would have an even greater incentive to form business entities and funnel as much of their income as possible through them. Excluding pass-through business income from the proposed surcharge, for example, would allow a celebrity with a total income of $30 million per year to escape the surcharge entirely, avoiding $1.15 million in taxes, by shifting $20 million in compensation from wages to business income.

These are just a few ways in which people who have annual incomes above the $10 million and $25 million thresholds could seek to game the surcharge. Most people in that rarified income strata would probably not even have to game the surcharge to avoid it because, as discussed above, they receive the bulk of their incomes in the form of business profits or capital gains.


The millionaire surcharge is sound policy that would advance the dual goals of reducing inequality and raising revenue to support investments that promote a stronger and more inclusive economy. Attempts to weaken the surcharge by carving out income that is already preferentially taxed will subvert these goals, slash the amount of revenue raised, and encourage further gaming of the tax code.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.


Jean Ross

Former Senior Fellow, Economic Policy

Seth Hanlon

Former Acting Vice President, Economy

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