Windfall years are hard to predict.
Also, it’s much easier to get to a $1M peak income (inheritance, individual contributor at IPO, etc) than to get to $1M mean income (become a VC or executive).
I’d be curious to see a histogram of the 5-year rolling average incomes of the people paying this tax.
Consider building a house after the trump tax hikes in California with $1M from the top tax bracket.
After income tax, there’s $490K left.
Next come the Canadian lumber tariffs, which increased base cost per square foot from $300 to $360, which is another 20% effective tax.
Now there’s only $400K left. (Covid also increased prices. Ignore that.)
A normal time to IPO is 5-10 years, during which time people accept a depressed salary. The windfall post-tax is only $40-80K per year per million paid out, and salaries are typically at least $50-100K under market value.
On top of that, there are local “screw the rich people that can build homes” fees and regulations that nearly double the cost of construction, so that $1M ends up being $200-250K in actual purchasing power. So, assume they but instead of build, and don’t pay those fees.
$490K is something like one third of a house around here, so the person ends up borrowing to cover the tax.
Their average income was something like $240-280K (pre inflation numbers, pre-tax), which is 91th percentile California household income, and those are “jackpot” years for that person.
However, they ended up paying two years pre-tax salaries (3 years post tax) in income tax if they buy a house, and 6 years post-tax salary if they build.
Of course, the above is nuanced, so most people are all like “yeah, screw the rich” without realizing these taxes disproportionately hit the middle class.
It’s “only” another 4%, but if the millionaire tax ends up increasing someone’s effective tax rate from 76% to 80%, then it cuts post-tax income by almost 20% and it hits people whose average incomes are middle class.
I have no idea if things are like this in Massachusetts.
Building an expensive house in California is a specific choice that you do not need to make
I'm a life-long renter with a family and elderly mother to support, and an IPO windfall would give me some much needed breathing room.
I don't know who you picture when you think of a windfall recipient, but I can assure you I am not lighting any cigars with $100 bills.
(Edit: and that’s aggressively acting as if the marginal income tax rates were applied to the whole thing)
In a sibling comment, I explained what the situation looks like for that group out here in California (hint: people paying these taxes can’t necessarily afford a house).
Also, money is not worth the same amount here as it is in other states. You may as well be comparing British Pounds and US Dollars without applying an exchange rate (except that the gap between the dollar and pound is currently smaller than the gap between US dollar in California, and, say, Arizona).
One of the problems of wealth no doubt, but I am still bereft of tears for them. Imagine trying to make due with the merely the median household income in such a rich state, and not even getting the odd million dollar windfall once in awhile. And then realize that half of households must make due with less than that.