2009 July 12 Sunday
United States Top Income Tax Rates Increasingly Over 50%

Remember when the United States had very high marginal tax rates? Then starting with Carter and Reagan the top rates were lowered to the point where taxes weren't severely confiscatory. Well, those confiscatory days are coming back. If Obama succeeds in sticking it to higher earners in order to fund medical spending for poor people then in lots more states the top income tax rate will go above 50%.

Washington, DC, July 10, 2009 - As Congress considers a surtax on the nation's top earners to fund an expansion in federal health care, a new Tax Foundation analysis shows that 33 states would see top tax rates exceed 50%.

One new funding proposal being floated by the House Ways and Means Committee is a 4% surtax levied on couples with adjusted gross incomes (AGI) over $250,000 and individuals earning more than $200,000.

"Combining top federal and state rates, and factoring in all deductions, the government would be taking over half of every additional dollar from high-income taxpayers in two-thirds of the states under this latest funding scheme," Tax Foundation President Scott Hodge said. "In fact, even in the seven states with no income tax, the lowest top tax rate would be about 46%."

Tax Foundation Fiscal Fact No. 176, "Top Effective Marginal Rates Under a 4 Percent Health Care Surtax by State," may be found online at http://www.taxfoundation.org/publications/show/24848.html.

The hardest-hit states would be Hawaii (55.8%), Oregon (55.8%), New Jersey (55.6%), California (55.4%), Rhode Island (54.8%), Vermont (54.4%), New York (54.00%), Maine (53.6%), Minnesota (53.0%), and Idaho (52.9%). Washington, DC, and New York City would see their top effective marginal rates rise to 53.6% and 57.3%, respectively. The effective marginal tax rate takes into consideration deductions and adjustments in order to present a truer measure of an individual's rate.

To me there's something morally outrageous for the government to take half of what you earned. Whatever did the government do to deserve taking more than half? This 4% surtax will kick in above $200k for single filers.

9 states still have no income tax. So the top federal rate of 45.9% will be the top total rate for them.

Only 17 states would see their top tax rates remain under 50%, with 45.9% being the lowest in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

High earners who do not want to pay over half of their marginal dollar in taxes should think about moving to places where you will still be able to keep half of what you earn. Also, write to your elected representatives and strongly suggest that the Leviathan should be cut down rather than expanded.

Obama aims to increase redistribution.

Washington, DC, June 25, 2009 - New analysis of President Obama's Budget finds that he is targeting the nation's highest earners for greater income redistributions. By 2012, the federal government is scheduled to be redistributing an extra $79 billion from the top-earning 5 percent of American families, and $71 billion of that will be paid by the top-earning 1 percent of families.

"That's an additional $64,000 per family redistributed from the top-earning 1 percent," said the Tax Foundation's president Scott Hodge, "on top of the already substantial $368,000 that would have been redistributed from each family even without President Obama's new policies."

"Part of that change is higher taxes, and part is lower spending on items that benefit high-income people," said the study's lead author, Tax Foundation Senior Economist Gerald Prante.

The new study is No. 168 in the Tax Foundation Special Report series, titled, "How Much Does President Obama's Budget Redistribute Income?" by Prante and his co-author, Chief Economist Patrick Fleenor, and is available online at www.taxfoundation.org/publications/show/24783.html.

Consider the longer run context of a 4% income surtax added just for medical spending for non-retired. The US federal government is running a huge deficit that looks set to continue for years to come. That deficit creates pressure for additional tax increases to balance the budget. But if medical spending is already going to raise the top marginal tax rate above 50% in most states what will happen to that rate once taxes are increased to balance the budget? The marginal return on tax increases will go negative. As a consequence, beware of value-added tax as a way to get even more revenue once income taxes run out of steam.

Share |      By Randall Parker at 2009 July 12 12:41 AM  Economics Health


Comments
Matlock said at July 12, 2009 6:15 PM:

Taxing the "super wealthy" is a no-brainer for Obama and the democrats. Pleases the base and the middle class. $71 billion is chump change though in the context of the projected deficits and almost a symbolic gesture. Its almost funny as there is zero chance that the fiscal conservative, socially liberal vote will go to the republicans. Wealthy social liberals will vote Obama/democrat no matter what he does to their marginal tax rates, the economy or anything. Even if he increased marginal rates to 75% or 85% and bombed Iran they wouldn't vote for the party of Sarah Palin. What they would do though is convince themselves that they are morally justified in avoiding the new higher tax rates through "aggressive tax planning" and every other possible means. A lot of the super wealthy will express their anger by moving to New Hampshire or Florida and voting democrat.

Aki_Izayoi said at July 12, 2009 7:49 PM:

Randall,

could you tell me why McCain and Palin lost? I do not think it could solely be explained by the appeal of Obama. Right-wing politics is still appealing to many people in the US. Do you think the loss can be explained by the failure of the Republican Party's platform of free markets? Do you think the Republican's failed to appeal to innate nationalistic tendencies? Do you think it is a failure of the US itself because of its diversity -- even among white people there are many different interests; for example, white people in the midwest have different interests than white people on the west coast. Even though I admitted that I am sympathetic to "social democracy," I admire the right-wing Nicholas Sarkozy for being nationalist because he wants protectionist policies to preserve jobs and he doesn't welcome incompatible cultures in Frace.

Regarding taxes (especially corporate):

I think the best outcome in this economic crisis would be trade protectionism and its subsequent retaliation. I remember Robertson Morrow discuss that not only free trade brings downward pressure on incomes, it also brings downward pressure on corporate taxes.

The rich favor globalization and are opposed to protectionism. One way to break up their power is increased trade barriers. For example, consider a company in France that relocates their factories in Poland because of lower wages and lower taxes. France, given the Sarkozy is a nationalist right-winger, would try to protect French jobs by impose tariffs (breaking WTO agreements and maybe their terms with the EU) on goods. The company, however, might accept the risk of losing the French market because it will benefit from cheap labor and/or taxes. However, would the company accept the risk when EVERYONE does it because it would result in their markets for their goods to be restricted if they use cheaper labor?

(An argument against countries adopting protectionist policies is that they fear retailation, and prefer to use central bank manipulation to keep a "competitive" exchange rate. Countries such as Germany and Sweden wouldn't adopt protectionist measures as the risk/reward for such a proposition isn't worth it since they have large trade surpluses and the retaliation would hurt them. This might be overcome if a country like Germany adopts trade barriers with a country that it has a trade deficit with or are in industries that it competes with. Germany, in this case, would not be hurt as much from retaliation unless the other country has plenty of allies that also retaliate against Germany.)

Sure, there might be "gains" from trade, but the main question is who gets those gains? Do the rich have value transferance capital to transfer the gains from trade to themselves? And who loses? However, it seems clear to me that if free trade was destroyed, the downward pressure on wages and individual and corporate taxes would be removed. Only those whose jobs or source of income that isn't threatened from labor competition are those who benefit from free trade. Even unskilled jobs that cannot be outsourced are negatively affected in an indirect way; the job losses from trade increases the supply of labor.

In the 19th century, the rich favored protectionism (for example, the Republican Party used to run on a protectionist platform) because capital wasn't mobile and suffrage was restricted. The protectionist agenda isn't left-wing only platform. It can be co-opted with a right-wing "America first" message. For example, Paul Craig Roberts and Patrick J. Buchanan aren't left-wing hacks and they oppose free trade. Of course, as you know Randall, protectionism not only protects jobs, but it is poliitcally appealing because of the innate biases that favor the in group.

Red Baron said at July 12, 2009 8:04 PM:

And the craziest thing of all is it doesn't work (I refer you to a model known as Sugarscape developed by Joshua Epstein of the Brookings institution).

Tax the wealthiest Americans all you want (say 99% of their income) and income inequality remains the same. Let me explain:

If wealthy Americans are taxed 99%, the money moved to poor people will suddenly need to go to one of two places- savings or spending. Either way the outcome for society is the same

Scenario A: The poor save their new found money. If they save it, it still has to go somewhere. And it will go back to wealthy workers (the very same who are being taxed at 99% of their income) in the form of investment into their organizations/companies... Of course as these skilled workers are taxed at 99% of their income, they will need to earn substantially more money than they did before in order for the investment money tat is going to them to be worth their time (because so much is taken in taxes).

Scenario B: The poor spend their new found money. The same thing will happen as in scenario A only in this case it will go to the wealthy workers who produce the good the poor want to buy (and again, they will need to be paid higher rates as so much of their money is taken from them).

Society cannot solve an underlying income inequality issue through taxes- ever.

Although to be fair, Epstein takes aim at people like me who have come to "misinterpret his work" because he did found you can change some things by changing things like inheritance taxes, etc...


My point is the plan won't even work.

Randall Parker said at July 12, 2009 8:15 PM:

Aki_Izayoi,

McCain and Palin lost for a few reasons:

1) The party in power always loses in a recession. Note that I predicted the outcome in early February 2008. That was an easy call just based on the recession.

2) The Iraq debacle. Huge amounts of money and lives wasted to no good end.

3) McCain was too old and cranky with a flawed personality and Palin was too inexperienced and not knowledgeable about national issues.

I think the first two reasons were already enough to ensure a Republican defeat. Heck, the first reason alone was enough.

Obama's problem in 2012: Oil supplies. If high oil prices keep the economy down then the odds are against him winning reelection no matter how much the liberal press lauds and glorifies him.

Aki_Izayoi said at July 13, 2009 2:44 AM:

Randall,

Yes, the party in power losses during a recession. But what are the grievences against the party in power specifically? A non-progressive tax policy? Immigration? Free trade? I suppose most people are dumb that they couldn't enumerate a list of grievences and just vote the party out.

How likely do you think protectionism is during the economic crisis? Do you think protectionism will remove the downward pressure on corporate taxes?

Bled Whyte said at July 13, 2009 5:59 AM:

"My point is the plan won't even work."

It is not supposed to.

Randall Parker said at July 14, 2009 5:50 PM:

Aki_Izayoi,

Grievances? They let a recession happen. End if story. The masses are extremely ignorant. They just vote against the party in power because they are unemployed or working fewer hours or there've been cutbacks or rumours of cutbacks at their job. They do not think thru what exactly they are for or against.

Recessions inevitable? Not fair to blame the party in power? The masses do not understand or care.

Protectionism: Well, the elites are opposed. So there's a limit to how much more protectionism we'll get. I expect a very small increase in trade barriers.

Paul Hacket said at July 28, 2009 3:00 PM:

I guess the person who wrote this post enjoys revelling in dishonesty. Is that the latest Republican trait?

A few simple points -

Are you aware that this rate includes ALL POSSIBLE state taxes, medicare, etc, INCLUDING SALES TAX?

Are you aware that it only applies to people earning more than $357,000 per year (if single, twice that if married) and that even then, IT ONLY APPLIES TO ANY ADDITIONAL INCOME BEYOND THE FIRST $357,000 YOU EARN?

Are you aware that from the mid 1930s to the late '80s (arguably the most prosperous period in US history), the maximum tax bracket averaged well over 70%? It was actually over 90% in the from the forties through to the late sixties - woah, Eisenhower must have been a socialist!

Are you aware that all Obama is doing is basically rolling back to a bracket lower than the one they were at during Reagan's first six years in office?

Are you aware of any of the above?

Probably not.

But hey, if any of you wonderful hedge fund traders or Wall Street CEOs earning several million dollars+ per year are ready to ditch the US of A due to the fact that you don't want to support American society in a time of need then by all means leave. Don't let the door hit you on the way out.

Randall Parker said at July 29, 2009 8:50 PM:

Paul Hacket,

The top income tax rates I refer to do not include sales taxes. This is only income taxes. They do not include property taxes or sales taxes.

Yes, I'm aware of how high income taxes were in the past.

Stop acting like an idiot.


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