Image source: Bernie Sanders. 

Election season is now well under way, and with the Iowa caucuses and New Hampshire primary now well in the rearview mirror, Americans can narrow their focus to the eight remaining candidates (two Democrats and six Republicans).

Sanders' tax plan allows him to stand out
One could argue that the biggest story this year has been the popularity of Vermont senator Bernie Sanders. Viewed as a candidate who goes against traditional political ideals, Sanders has garnered the support of millennial-age voters across the country. You could almost say voters' distaste for political inaction has driven Sanders' favorability.

However, it's Sanders' cornerstone tax plan that's really fueled his popularity. Sanders' plan calls for tax increases on all wage classes and households with the goal of boosting tax revenue and implementing his Medicare for All reform, which would institute a universal healthcare system within the United States.

While completely up to interpretation and modeling, the Tax Foundation was among the first to release its take of what Sanders' tax plan might do to the U.S. economy. Its take? Cross your fingers and hope for the best. The Tax Foundation foresees a $13.6 trillion increase in collected tax revenue on a static basis (meaning when no broader economic impact of Sanders' tax reform is included in its models) over the next decade, but a final increase of just $9.8 trillion. Why the $3.8 trillion gap? According to the Tax Foundation, this is because of an expected 9.5% reduction in long-term GDP, a nearly 19% decline in capital investment, a 4.3% drop in wages, and approximately 6 million fewer full-time-equivalent jobs.

Image source: Pixabay.

Taxes on the rich would change drastically
But it's Sanders' taxes on America's wealthiest individuals and households (i.e., those earning $10 million, or more, annually) that's truly an eye-opener. Let's briefly take a closer look at what rate the top wage-earners could be taxed in the event that Sanders becomes president and successfully passes his tax reform proposal.

Ordinary income: Under the progressive seven-tier tax brackets we have now, income above $415,050 for single filers, $466,950+ for married filers, and $441,000+ for heads of household are taxed at the maximum ordinary income tax rate of 39.6%. Keep in mind that only income earned above these levels is taxed at 39.6%.

Under Sanders' tax reform, the top-tier would involve anyone earning $10 million or more income. This income would be taxed at a new ordinary rate of 52%! Other well-to-do Americans would potentially deal with higher taxation as well, with newly introduced brackets of 37%, 43%, and 48% accompanying the 52% tax bracket, as you can see below.

Healthcare premium tax: In addition to what amounts to a 12.4% ordinary income tax increase over the current system, all Americans, regardless of their income bracket, would be subjected to an income-based 2.2% healthcare premium tax. This tax would be used in conjunction with a 6.2% employer tax to pay for the rollout of Medicare for All. Sanders has noted that deductions could allow a family of four earning less than $28,800 a year to pay nothing in taxes. Yet, for the richest Americans, this would boost ordinary income tax rates from 52% to 54.2%.

Ordinary Income Capital Gains and DividendsSingle FilersMarried FilersHeads of Household 
12.2% 2.2% $0-$9,275 $0-$18,550 $0-$13,250
17.2% 2.2% $9,275-$37,650 $18,550-$75,300 $13,250-$50,400
27.2% 17.2% $37,650-$91,150 $75,300-$151,900 $50,400-$130,150
30.2% 17.2% $91,150-$190,150 $151,900-$231,450 $130,150-$210,800
35.2% 17.2% $190,150-$250,000 $231,450-$250,000 $210,800-$250,000
39.2% 39.2% $250,000-$500,000 $250,000-$500,000 $250,000-$500,000
45.2% 45.2% $500,000-$2,000,000 $500,000-$2,000,000 $500,000-$2,000,000
50.2% 50.2% $2,000,000-$10,000,000 $2,000,000-$10,000,000 $2,000,000-$10,000,000
54.2% 54.2% $10,000,000+ $10,000,000+ $10,000,000+

Table by author. Data source: Tax Foundation and IRS, 2016 income tax brackets.

Capital gains and dividends: Under the current system, the highest earning Americans find their capital gains from stock and asset sales taxed at a rate of 20%. There's also a net investment income surtax of 3.8% that can come into play for singles with income over $200,000 and couples earning more than $250,000.

However, under Sanders' plan this amount of taxation would seem mild. Sanders intends to tax dividends and capital gains of individuals and households earning $250,000 or more annually at the same rate as ordinary income. Thus, an individual who earns $10 million or more annually would be paying a 54.2% tax on his or her capital gains and dividends -- the same rate as they would pay on ordinary income.

Payroll taxes: Additionally, Bernie Sanders' tax plan calls for major Social Security reforms, the largest of which would be a lift of the payroll tax cap on earnings in excess of $250,000.

As it stands in 2016, all working Americans are responsible for their portion of payroll taxes up to $118,500 in income. Any income earned beyond this point is untaxable by the Social Security program. Sanders' proposal would keep this dollar figure in place (and presumably allow it to rise in step with inflation), while exempting earned income between $118,500 and $250,000 from additional payroll taxes. However, income of $250,000 and up would once again be subject to payroll taxes.

Typically, you and your employer split the 12.4% tax that's paid into the Social Security program. This means you pay 6.2%, and your employer pays 6.2%. If a wealthy individual also happens to be self-employed, they would be responsible for all 12.4%.

Itemized deductions: Lastly, Sanders' tax plan calls for a scaling back of the deductions that the richest of the rich can claim on their taxes. If Sanders' tax plan is implemented, the best America's wealthiest individuals could hope for are itemized deductions at 28% of their value.

All told, according to calculations from The New York Times, the combined tax rate for the nation's wealthiest Americans could top 73%, or more than 20 percentage points higher than what they're paying today. Keep in mind this combined tax rate is based on an average state. Wealthy households in states like California and New York, which boast higher in-state taxes, could pay even higher combined tax rates.

Image source: Pixabay.

Taxing the rich: Good or bad idea?
Ultimately, Sanders' tax proposal comes down to whether or not dramatically raising tax rates on the rich will generate sufficient revenue to implement Medicare for All.

On one hand, even though the rich do pay a proportionately higher rate of taxes than the average American, it's tax income from middle-class and upper-middle-class families that generates the bulk of federal income tax revenue for the government. Thus, taxing the rich at a higher rate only boosts their cumulative contribution relative to the middle-class American family. And because we're talking about individuals and households earning more than $10 million annually, there's also the presumption that they can afford to pay a little more and still remain in the well-to-do category.

But potential flaws could exist in Sanders' attempts to tax the rich at such a high level.

To begin with, as pointed out by The New York Times, the relationship between a higher tax rate and upper-income individuals is a curve. As you reach what's known as the revenue-maximizing tax rate, or the rate at which combined tax rates would actually lead to lower revenues, incomes rise by a much slower pace and the additional tax revenue being generated is no longer proportional. In other words, there comes a point where high enough tax rates could drag on pre-tax incomes and actually push tax revenue down. Some economists have postulated this level to be right around where Sanders' top-tier combined tax rate currently sits.

Another problem could be in ensuring that the rich do pay their fair share. If the wealthiest Americans are facing combined tax rates in the 70-percentile range, they may simply move themselves, or their assets, overseas. We've witnessed businesses doing so to avoid America's high corporate tax rates, and I wouldn't put it past some of the richest Americans to make the same move.

Thirdly, I have personal concerns about taxing capital gains and dividends at an ordinary rate. Doing so may discourage long-term investing and send the wrong message to Americans, who by the way are already poor savers relative to other developed countries. If the rich are discouraged from investing, we could see a very poor reaction from Wall Street and the stock market.

Lastly, there's always the highly debatable concern regarding what might happen to job creation. The wealthy are consumers, business owners, and job creators, and the assumption here is that if we remove too much disposable income out of their pockets via taxation, then jobs, capital investment, productivity, and wages could all suffer.

What do you think: Is Bernie Sanders' plan to tax the rich a good or bad move for the U.S. economy? Sound off in the comments section below.