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Key Context on Obama's Vague Proposed Millionaires' Tax

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Here, a run-through of what's actually known about Obama's tax proposal, the impact it might have on the deficit, and the history behind it all.

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On the whole, the wealthiest Americans now pay a smaller percentage of their income as taxes than the average taxpayer. According to the Wall Street Journal:

The average tax rate for the top 400 earners in the U.S. fell to as low as 16.62% in 2007 from a recent peak of 29.9% in 1995. It ticked up again in 2008 to 18.11%, according to the latest annual Internal Revenue Service analysis of returns.

Why Do the Rich Pay a Lower Percentage Than Other People?

A huge component of this is the capital gains tax, which investors have to pay on the profits they make from selling stocks, bonds or real estate. For long-term investments, that tax rate is capped at 15 percent -- much lower than the rate at which wages and salaries are taxed for most people.

The Washington Post recently wrote a great piece that explains how the tax on capital gains primarily benefits the wealthy, who earn a far larger slice of their income via stocks and bonds than do middle-class Americans:

Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.

Have the Capital Gains Taxes Always Been So Low?

No. In 1986, the The Tax Reform Act backed by President Reagan and key congressional Democrats eliminated the special treatment for capital gains and dividends by bringing the peak tax rates for salaries and investments to the same level -- 28 percent.

But as the Post details, under the Clinton and George W. Bush administrations, the capital gains tax rate was bumped down to a historic low -- thanks in large part to Fed Chairman Alan Greenspan, who advocated getting rid of the tax.

Are There Any Proposals to Change the Capital Gains Tax?

Yes. At least five GOP presidential candidates have said they support eliminating it although doing so would almost certainly increase the deficit. They argue that eliminating it would spur investment and economic growth.

Meanwhile, President Obama's bipartisan fiscal commission proposed raising the capital gains tax to match the tax rate for ordinary income. According to economist Leonard Burman at Syracuse University's Center for Policy Research, it's not clear that the current historically low capital gains tax has had any effect on economic growth.

How Much Money Would These Millionaire Taxes Raise, and What Impact, If Any, Would It Have on Reducing the Deficit?

It's hard to know until the actual tax rate is decided, but the Wall Street Journal has described the proposal: "unlikely to have much practical impact on federal deficits anytime soon."

Ezra Klein's WonkBlog reviewed a few past proposals that involve higher taxes on millionaires, and they were all over the map both in terms of total dollars and years measured. One would raise a modest $10 billion over three years, while two others would raise $500 billion or nearly $1 trillion over ten years respectively.

Editor's Note: This article by Lois Beckett and Marian Wang was originally published on ProPublica.org.

No positions in stocks mentioned.
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