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Hillary Clinton's special 4% tax on multimillionaires, explained

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Speaking in Iowa today, Hillary Clinton offered a proposal for a kind of supercharged Buffett Rule that would ensure very high-income individuals would pay higher tax rates regardless of the source of their income.

The idea is what her campaign is calling a "Fair Share Surcharge" of 4 percent on incomes above $5 million per year. It's characterized as a surcharge rather than a 4 percentage point increase in the top marginal tax rate because the intention is to levy the fee on all income above the $5 million line regardless of the source of the income.

Current law taxes income derived from investments at a lower rate than labor income, which economists have traditionally seen as maximizing capital investment and long-term growth, though a new body of research has cast considerable doubt on that conclusion.

A Clinton aide described the proposal as inspired by the recent release of 2013 tax data, which revealed that the top 400 high-income taxpayers in America paid an effective federal tax rate of just 23 percent, even though their average annual income, as a group, was a bit north of $250 million. The campaign says raising the effective tax rate on the very wealthy is a basic matter of fairness, and expects that with the threshold at $5 million it can raise $150 billion over a 10-year scoring horizon.

The political context is an ongoing argument with Bernie Sanders

In political terms, the context for this proposal is an ongoing argument with Vermont Sen. Bernie Sanders about the structure of taxation in the United States.

Sanders (and virtually all Democratic senators) supports the FAMILY Act, which would extend Social Security by granting all workers up to 12 weeks of family leave at 66 percent pay, in exchange for charging all workers slightly higher payroll taxes. Clinton, replicating a pledge that both she and Barack Obama made in the 2008 campaign, has pledged to avoid any tax increases for people earning less than $250,000 a year, which would rule out the FAMILY Act's funding mechanism.

Clinton has sought to use this issue against Sanders, positioning herself as the true champion of middle-class interests, while Sanders has earned wonk points by embracing what is generally considered to be sound policy design by financing broad social insurance with a broad tax.

Clinton's surtax proposal draws further attention to a contrast she welcomes — she'll soak the rich, while her socialist opponent wants to soak you — and gestures in the direction of an answer to how to find adequate tax revenue to finance the progressive agenda without asking some middle-class people to pay some of the load. Clinton's team says she's not done on the tax fairness front, and hints that even more soak-the-rich proposals are to come in advance of this weekend's debate.

This is a nonstarter with Congress

In terms of trying to assess what will happen if Hillary Clinton becomes president, these proposals are pretty clearly irrelevant. It's certainly conceivable that if she wins, a chastened GOP will make some steps toward policy moderation. But the structure of this proposal — both in its hyper-targeting of the rich and especially in its focus on capital income — is almost perfectly designed to be dead on arrival in a Republican Congress.

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