Millionaire Tax Is Little More Than a Down Payment on Fairness

New Republican proposals for a millionaire tax might sound like a stab at fairness. But history and structural realities show that minor incidental reforms risk entrenching inequity rather than resolving it.

Enacting, and then celebrating, superficial marginal tax rate tweaks without tackling the underlying tax base could stall political momentum for broader reform. This risks making real reform less likely.

The fundamental issue isn’t that top marginal rates are too low—it is that our tax base is too narrow, too opaque, too porous, and too rigged toward the accumulation of wealth without income. A new bracket won’t change that, but a serious rethinking of what we tax, and how we tax it, would.

What’s needed isn’t a marginal rate hike packaged as radical reform, but a structural reset that includes taxing unrealized gains, ending the stepped-up basis, and closing the partnership and carried interest loopholes that keep wealth out of reach. You don’t fix a broken foundation by rearranging the furniture, and you can’t piecemeal your way to equity in the tax code.

A millionaire tax might raise the top marginal rate on reported income for the ultrawealthy, but that is a narrow sliver of their economic income. Most of their net worth stems from capital appreciation, investment income, and carefully structured entities designed specifically to keep ordinary income to a minimum.

That means increasing the top rate on tax income for millionaires won’t hit their chief source of economic income—it’s less of a minor policy loophole and more of a major structural inadequacy.

Estimates of the federal tax gap—the difference between taxes owed and taxes paid—show that most missing revenue sits in the top income percentiles. The ultrawealthy can accumulate billions in unrealized gains without triggering a tax bill, pass income through opaque partnerships that bury profits under layers of accounting obscurity, and time realization of income to minimize liability. In many cases, such actions don’t run afoul of the tax code.

A new upper bracket doesn’t touch any of that but may give the illusion that it does. Even among fully reported income, the wealthiest households already pay preferential rates on what they do disclose: long-term capital gains, carried interest, and stepped-up bases.

Raising the top ordinary income rate is like slightly raising the price of tickets to solve the problem of folks sneaking into the movie theater. If anything, you’re prompting more people to slip in through the back door.

When policymakers slap a higher bracket on top of an already leaky tax code, they get to congratulate themselves. Headlines will tout a new dawn of fairness, press releases will celebrate the wealthy being held accountable, and voters may initially believe inequity has been addressed. But in this case, the substance won’t match the spectacle.

This isn’t a new observation, having been a studied phenomenon in academic tax circles for more than 60 years. Superficial changes often paper over deeper structural dysfunctions and create a false sense of closure.

Once symbolic reform is passed, the urgency to tackle deeper problems can fade. It may be tempting then to view a millionaire tax as harmless—or as a mild gesture in the right direction. But in reality, it may make future structural reform harder.

Every time lawmakers settle for such a tweak, they burn momentum that might have gone toward foundational change. Expanding the tax base to include unrealized gains, ending stepped-up basis in death, or addressing partnership opacity and the carried interest loophole would all do much more to combat inequity than a millionaire income tax bracket ever will.

If this new millionaire tax bracket is ultimately pursued, passed, and branded “historic” or “transformative,” how will advocates for reform persuade the public, much less policymakers, that more is needed? Once an item is crossed off the public policy to-do list, efforts that had been expended to push for solutions must be redirected toward convincing stakeholders that there is still a problem. The half-hearted reform becomes the ceiling, not the floor.

This may be how inequity in tax policy survives: not through outright defense by the ultrawealthy but through well-meaning bumper sticker reforms that exhaust the appetite for change without endangering the broader wealth inequity superstructure.

Policymakers who are serious about tackling inequity should refrain from symbolic gestures and instead pursue structural solutions. The real risk at this point isn’t in doing too little—it’s in doing the wrong thing and declaring victory.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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