TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, May 26, 2011

The Coming 62% Top Tax Rate

Wall Street Journal op-ed, A 62% Top Tax Rate?, by Stephen Moore:

Democrats have said they only intend to restore the tax rates that existed during the Clinton years. In reality they're proposing rates like those under President Carter.

Media reports in recent weeks say that Senate Democrats are considering a 3% surtax on income over $1 million to raise federal revenues. This would come on top of the higher income tax rates that President Obama has already proposed through the cancellation of the Bush era tax-rate reductions.

If the Democrats' millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That's more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s. ...

Now let's consider how our tax system today compares with the system that was in place in the late 1980s—when the deficit was only about one-quarter as large as a share of GDP as it is now. After the landmark Tax Reform Act of 1986, which closed special-interest loopholes in exchange for top marginal rates of 28%, the highest combined federal-state marginal tax rate was about 33%. Now we may be headed to 62%. You don't have to be Jack Kemp or Arthur Laffer to understand that a 29 percentage point rise in top marginal rates would make America a highly uncompetitive place. ...

What all this means is that in the late 1980s, the U.S. was nearly the lowest taxed nation in the world, and a quarter century later we're nearly the highest.

Despite all of this, the refrain from Treasury Secretary Tim Geithner and most of the Democrats in Congress is our fiscal mess is a result of "tax cuts for the rich." When? Where? Who? The Tax Foundation recently noted that in 2009 the U.S. collected a higher share of income and payroll taxes (45%) from the richest 10% of tax filers than any other nation, including such socialist welfare states as Sweden (27%), France (28%) and Germany (31%). And this was before the rate hikes that Democrats are now endorsing.

Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference The Coming 62% Top Tax Rate:


How did they get 62%? I get:

Top individual tax rate after Bush tax cuts lapse - 39.6%
Surtax income over a million - 3%
Estimated State tax rate (I am guessing here) - 5%
Federal tax benefit state tax deduction - 2% Less
Total Federal & State Tax Rate - 45.6%

Posted by: Angela | May 26, 2011 5:09:16 PM

Moore got some things wrong in his post, which isn't surprising. However, many go in the other direction as he would want.

39.6 + 2.9 + 0.9 + 5 + 1.2 + 12 + 3 less deductions against one another can get you to around 62%.

Top Fed Income Rate + Medicare Rate + New Medicare Hike + State Rate + Pease phaseout + S.S. Tax hike assumed + New Surtax assumed

Posted by: Milton | May 27, 2011 5:29:48 AM

Cut medicare- give tax breaks for the rich= the New Republican.

Posted by: Nick | May 27, 2011 9:20:32 AM

I understand what he's trying to say and he's largely correct, but using that same logic, we can argue that someone with an AGI of 34,000 is facing a marginal tax rate of over 43%.

25% + 15.3% (FICA) + 3 (net state rate).

Sure, Social Security and Medicare/Medicaid pay out more than they receive, so you could argue that they aren't really taxes, but insurance. Granted, there isn't any reason for someone with an AGI of $100,000 to pay a higher marginal tax rate than someone who earns $150,000, since you're just throwing money down the progressive SS drain at that point for negligible additional benefits.

Posted by: ry | May 27, 2011 10:36:30 AM

Propose nothing - scare seniors - bankrupt country = typical Democrats

Posted by: Woody | May 27, 2011 11:20:23 AM

Their op-ed pages are notoriously unreliable for tax info. A few months back they had NJ and MD racking up ultra high "death tax rates" because both have an estate and inheritance tax. The WSJ merely added the top rates under the two taxes. The problem is that both states impose a tax under whichever tax produces the higher result but do not impose both. Their op-Ed pages are hysterical unreliable sources of information. They were always bad but seem to have gotten worse in recent years.

Posted by: Bill | May 27, 2011 3:31:41 PM

If we as a society are going to have a discussion about tax rates our contribution as academics should be to evaluate the accuracy of what is being presented in the WSJ.

Points to consider:

* For the "coming" 62% the author included: the employee 1.45% Medicare tax which is uncapped. I agree that is a tax that should be included when determining the tax rate for taxes (income + payroll) on earnings. The author then took it a step further and increased the rate by 1.05% for the employer's portion of the uncapped Medicare tax under the theory that the employer passes the tax onto the employee. I find that assumption questionable.
* The author then assumes that the OASDI portion of FICA will also be uncapped. If that happened then an employee's tax rate would be increased by 6.2%. The author once again assumes the employer portion would be passed onto the employee and increases the rate by 3.9% to 10.1%. Again I find the assumption questionable.
* The author assumes a proposed phase out of deductions will be enacted that would result in a rate increase of 1.9%. Besides being vague, most likely would not be such a large % for taxpayers with taxable income over $1M.
* Statement that "coming" 62% rates is comparable to Jimmy Carter highest rate of 70% first ignores that the 62% includes 4% for state taxes (so 58% would be the better comparison, and that's allowing for the author's questionable items noted above) and then goes on to ignore that at that time the maximum tax rate on earned income was 50%. To keep it an apples-to-apples comparison 50% is clearly the relevant rate as the 12.6% of the "coming" rate is for payroll taxes. A more correct comparison would be a "coming" 58% federal rate compared to a 50% "Carter years rate", with the majority of that increase owed to the proposed uncapping of OASDI not the proposed 3% surtax which the article lead with.

Did the WSJ vet this article at all? It doesn't seem to constitute accurate reporting. To be fair, our tax system is complicated which makes this a complicated discussion. But this article seemed more intent on inflaming then informing.

Posted by: Angela | May 27, 2011 4:21:14 PM