- - Wednesday, October 12, 2011

ANALYSIS/OPINION:

U.S. economic growth has long outpaced that of other developed countries, making our economy the envy of the world. A huge contributor to that success has been our standing as a relatively low-tax nation. But you can kiss that competitive edge goodbye if the millionaire surtax currently under consideration in the Senate becomes law.

Like a horror-movie villain, the millionaire tax is once again back from the dead. This version - the third in the past two years - would slap a 5.6 percent surtax on everyone earning $1 million or more per year. It’s Senate Majority Leader Harry Reid’s way of paying for President Obama’s misnamed job-creation plan.

The surtax would pile on top of the 39.6 percent marginal tax rate long called for by Mr. Obama and congressional Democrats. Throw in state and local income taxes, and the 3.8 percent Medicare surtax created under Obamacare and it all adds up to an average marginal income tax rate of 55 percent.

That would leave the U.S. with the third highest tax rate among developed nations in the 30-member Organization for Economic Cooperation and Development. We would trail only Sweden and Denmark in this unappealing category.

Of course, wealthy taxpayers in states with above-average top marginal income tax rates would make out worse. Those in Oregon, Hawaii and New York would pay the highest tax rates in the developed world. Yippee.

Millionaires in 11 other states - California, Iowa, New Jersey, Vermont, Maine, Maryland, Minnesota, Idaho, North Carolina, Wisconsin, and Ohio - would face more punitive rates than every developed country except Denmark.

Millionaires in the nine states with no state income taxes will have little to gloat about. They would still be taxed at a higher rate than that in all but seven other developed countries. Indeed, they could move to many traditional high-tax countries - such as France, Germany, Italy or Spain - and still get better rates than Mr. Reid, Nevada Democrat, offers.

In the global race for investment and capital, the millionaire tax would make almost every other developed country more competitive than the U.S. As such, the surtax can only work against to the stated aim of the jobs plan it’s supposed to pay for. This ill-considered tax hike would fall squarely on the folks best situated to create jobs, reducing their means, and their incentive, to add new workers.

Investors and small, unincorporated business owners earning more than $1 million a year are directly responsible for creating jobs. Investors provide existing businesses and startups with the capital needed to expand and hire new workers. It’s risky business, and raising their taxes simply reduces the reward they might expect to reap from their investments, leaving them far more leery of taking a chance on a start-up.

Proponents of soak-the-rich tax plans are fond of saying that only a few businesses would pay higher taxes under their proposals. But a recent Treasury Department study found that the millionaire tax would hit 50 percent of all income earned by businesses that pay through the individual income tax code and employ workers.

A millionaire surtax would permanently plague the economy with reduced economic growth and job creation. Yet the highly questionable jobs policies it would finance are temporary. Even if this latest stab at government “stimulus” were to succeed, in the end the millionaire tax would wind up costing more jobs than the temporary stimulus could ever create.

Mr. Obama frequently calls his tax hike plans “tax reform,” but one of the goals of tax reform is to improve economic growth and enhance job creation. The millionaire tax would inhibit both.

It would be far more productive if the president and his congressional allies pursued true tax reform, which would repair the tax base and lowermarginal tax rates. But that would mean dropping the political advantage of class-warfare rhetoric for the economic good of the country.

• Curtis Dubay is senior tax policy analyst at the Heritage Foundation’s Roe Institute of Economic Policy Studies.