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A 62% tax rate?


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MAY 26, 2011

A 62% Top Tax Rate?

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.

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By STEPHEN MOORE

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.

Here's the math behind that depressing calculation. Today's top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%. The 3% millionaire surtax raises that rate to 44.5%.

But payroll taxes, which are income taxes on wages and salaries, must also be included in the equation. So we have to add about 2.5 percentage points for the payroll tax for Medicare (employee and employer share after business deductions), which was applied to all income without a ceiling in 1993 as part of the Clinton tax hike. I am including in this analysis the employer share of all payroll taxes because it is a direct tax on a worker's salary and most economists agree that though employers are responsible for collecting this tax, it is ultimately borne by the employee. That brings the tax rate to 47%.

Then last year, as part of the down payment for ObamaCare, Congress snuck in an extra 0.9% Medicare surtax on "high-income earners," meaning any individual earning more than $200,000 or couples earning more than $250,000. This brings the total tax rate to 47.9%.

But that's not all. Several weeks ago, Mr. Obama raised the possibility of eliminating the income ceiling on the Social Security tax, now capped at $106,800 of earnings a year. (Never mind that the program was designed to operate as an insurance system, with each individual's payment tied to the benefits paid out at retirement.) Subjecting all wage and salary income to Social Security taxes would add roughly 10.1 percentage points to the top tax rate. This takes the grand total tax rate on each additional dollar earned in America to about 58%.

Then we have to factor in state income taxes, which on average add after the deductions from the federal income tax roughly another four percentage points to the tax burden. So now on average we are at a tax rate of close to 62%.

Democrats have repeatedly stated they only intend to restore the tax rates that existed during the Clinton years. But after all these taxes on the "rich," we're headed back to the taxes that prevailed under Jimmy Carter, when the highest tax rate was 70%.

Taxes on investment income are also headed way up. Suspending the Bush tax cuts, which is favored by nearly every congressional Democrat, plus a 3.8% investment tax in the ObamaCare bill (which starts in 2014) brings the capital gains tax rate to 23.8% from 15%. The dividend tax would potentially climb to 45% from the current rate of 15%.

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 is particularly worrisome about this trend is the deterioration of the U.S. tax position relative to the rest of our economic rivals. In 1990, the highest individual income tax rate of our major economic trading partners was 51%, while the U.S. was much lower at 33%. It's no wonder that during the 1980s and '90s the U.S. created more than twice as many new jobs as Japan and Western Europe combined.

It's true that the economy was able to absorb the Bush 41 and Clinton tax hikes and still grow at a very rapid pace. But what the soak-the-rich lobby ignores is how different the world is today versus the early 1990s. According to the Organization for Economic Cooperation and Development, over the past two decades the average highest tax rate among the 20 major industrial nations has fallen to about 45%. Yet the highest U.S. tax rate would rise to more than 48% under the Obama/Democratic tax hikes. To make matters worse, if we include the average personal income tax rates of developing countries like India and China, the average tax rate around the world is closer to 30%, according to a new study by KPMG.

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.

Perhaps there can still be a happy ending to this sad tale of U.S. decline. If there were ever a right time to trade in the junk heap of our federal tax code for a pro-growth Steve Forbes-style flat tax, now's the time.

Mr. Moore is a member of the The Journal's editorial board.

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Some rhetorical sleight of hand going on here:

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.

So it adds up some unnamed state's top tax rate with the federal rate to get to 62% as a top marginal rate on some incomes and then compares it with ONLY the federal rate from 1989. That's dishonest.

But it gets worse. That 62% isn't even just comprised of federal and state income tax rates. They took the top marginal state and federal income tax rates, added in a bunch of other taxes that aren't classified as income taxes and then compared that figure to only the federal income tax rate in 1989.

That gives a highly skewed comparison. For the comparison to be legit, they'd need to go back to the highest state income tax rate in 1989 and add that to Reagan's 28% federal rate, then add in payroll taxes (including the employer's share just as they did for the 62% figure) as they were in 1989 plus any other similar miscellaneous taxes that existed back then that perhaps don't exist now.

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Some rhetorical sleight of hand going on here:

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.

So it adds up some unnamed state's top tax rate with the federal rate to get to 62% as a top marginal rate on some incomes and then compares it with ONLY the federal rate from 1989. That's dishonest.

But it gets worse. That 62% isn't even just comprised of federal and state income tax rates. They took the top marginal state and federal income tax rates, added in a bunch of other taxes that aren't classified as income taxes and then compared that figure to only the federal income tax rate in 1989.

That gives a highly skewed comparison. For the comparison to be legit, they'd need to go back to the highest state income tax rate in 1989 and add that to Reagan's 28% federal rate, then add in payroll taxes (including the employer's share just as they did for the 62% figure) as they were in 1989 plus any other similar miscellaneous taxes that existed back then that perhaps don't exist now.

But, is 62% a reasonable tax bracket for anybody? Why would anybody take a risk at starting a new business if every extra dollar will be taxed at 62%?

Even if you consider a single person making a lower middle class salary of $35000, the tax rates are ridiculous on every additional dollar.

Federal 25% + State 5% + Social Security 12.4% + Medicare 2.9% + City 1% = 46.3%. That's crazy!

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Some rhetorical sleight of hand going on here:

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.

So it adds up some unnamed state's top tax rate with the federal rate to get to 62% as a top marginal rate on some incomes and then compares it with ONLY the federal rate from 1989. That's dishonest.

But it gets worse. That 62% isn't even just comprised of federal and state income tax rates. They took the top marginal state and federal income tax rates, added in a bunch of other taxes that aren't classified as income taxes and then compared that figure to only the federal income tax rate in 1989.

That gives a highly skewed comparison. For the comparison to be legit, they'd need to go back to the highest state income tax rate in 1989 and add that to Reagan's 28% federal rate, then add in payroll taxes (including the employer's share just as they did for the 62% figure) as they were in 1989 plus any other similar miscellaneous taxes that existed back then that perhaps don't exist now.

I love the way you take one sentence and pretend that because of that sentence there is no good info in the article...that's dishonest. Now back to the point...Do you think that the possibility of an almost 62% tax rate is a good thing? Do you think it will encourage the wealthy to invest in growing the economy?

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I love the way you take one sentence and pretend that because of that sentence there is no good info in the article...that's dishonest. Now back to the point...Do you think that the possibility of an almost 62% tax rate is a good thing? Do you think it will encourage the wealthy to invest in growing the economy?

The "one" sentence was the attention grabbing headline and the launching point for the entire rest of the article. It grossly exaggerates the point to make it look as if the Democrats are proposing what amounts to an almost 40% rate hike on certain income levels as compared to the golden Reagan years. It's a bald-faced lie to stack the statistical deck like this. If you're going to compare the tax rates of two eras, then do it honestly and compare apples to apples.

The question doesn't even make sense because no one is paying 62% of their income in taxes. Not Warren Buffett, not Bill Gates, not the millionaire in your neighborhood.

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Some rhetorical sleight of hand going on here:

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.

So it adds up some unnamed state's top tax rate with the federal rate to get to 62% as a top marginal rate on some incomes and then compares it with ONLY the federal rate from 1989. That's dishonest.

But it gets worse. That 62% isn't even just comprised of federal and state income tax rates. They took the top marginal state and federal income tax rates, added in a bunch of other taxes that aren't classified as income taxes and then compared that figure to only the federal income tax rate in 1989.

That gives a highly skewed comparison. For the comparison to be legit, they'd need to go back to the highest state income tax rate in 1989 and add that to Reagan's 28% federal rate, then add in payroll taxes (including the employer's share just as they did for the 62% figure) as they were in 1989 plus any other similar miscellaneous taxes that existed back then that perhaps don't exist now.

But, is 62% a reasonable tax bracket for anybody? Why would anybody take a risk at starting a new business if every extra dollar will be taxed at 62%?

Even if you consider a single person making a lower middle class salary of $35000, the tax rates are ridiculous on every additional dollar.

Federal 25% + State 5% + Social Security 12.4% + Medicare 2.9% + City 1% = 46.3%. That's crazy!

Owners of small businesses get half of the SS and Medicare tax back as a deduction so they effectively still only pay .0765 for SS and Medicare. If they are an S-corp, C-corp or LLC who has elected to be taxed as an S-corp and thus treat themselves as an employee then payroll taxes are an expense and thus they end up paying less taxes because it decreases their profits and it is not counted as income. Just an FYI.

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I love the way you take one sentence and pretend that because of that sentence there is no good info in the article...that's dishonest. Now back to the point...Do you think that the possibility of an almost 62% tax rate is a good thing? Do you think it will encourage the wealthy to invest in growing the economy?

The "one" sentence was the attention grabbing headline and the launching point for the entire rest of the article. It grossly exaggerates the point to make it look as if the Democrats are proposing what amounts to an almost 40% rate hike on certain income levels as compared to the golden Reagan years. It's a bald-faced lie to stack the statistical deck like this. If you're going to compare the tax rates of two eras, then do it honestly and compare apples to apples.

The question doesn't even make sense because no one is paying 62% of their income in taxes. Not Warren Buffett, not Bill Gates, not the millionaire in your neighborhood.

I bet you didn't read the whole article, Titan, just that one sentence. That would explain your lack of comprehension.

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I bet you'd be wrong. I read the entire article. Nothing I've said needs to be retracted after doing so. Now, one may think so when they read this paragraph:

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.

However, again he's not being consistent. He didn't add back in the payroll taxes for instance that he included in the 62% figure.

Here's an article where someone showed the various ways in which Mr. Moore doesn't make even comparisons, has wrong numbers and so on:

Stephen Moore’s 62% Tax Rate – How to Compromise a Good Argument

Stephen Moore is an anti-tax guy from way back, working for Heritage, Cato, and Dick Armey. He and Art Laffer are interchangeable on CNBC whenever a supply-sider is in the discussion. Frequently appearing in print as a member of the Wall Street Journal’s editorial board, Moore’s never one to let facts get in the way of good argument.

Today he writes that Democrats are proposing tax increases that would result in a top marginal tax rate of 62% on some taxpayers, when all federal, state, and local taxes are considered. True?

The Hill reports that Senator Kent Conrad (D-ND) has a draft budget that includes a 3% surcharge on incomes in excess of $1M. When added to the top Clinton-era rate and the 0.9% Medicare tax included in the Affordable Care Act, the new top income tax bracket would be 43.5%.

Democrats also want to re-eliminate certain deductions that were re-allowed as part of the Bush tax cuts, to which Moore assigns an impact of 1.9%. While I don’t think that this should be included in a discussion of marginal rates, since most deductions are not driven by marginal income, I need to look into this further. So for now I’ll let him have his claimed new top marginal rate of 45.4%.

Moore then adds in 2.5% for the Medicare payroll tax, correctly arguing that part of the 1.45% tax paid by employers would otherwise go to the employee; interestingly, this is a higher figure than Congressman Paul Ryan used recently. This brings the total marginal federal tax on earned incomes in excess of $1M to 47.9%. Moore then adds the impact of eliminating the $106,000 cap on the Social Security payroll tax, which he says Obama recently mentioned. Moore says this would add mean about 10.1% of additional tax on the top wage earners (again, Moore’s math on this is solid).

This brings us to a potential top federal marginal tax rate of 58%. Add to this an average state income tax rate of 4% (which is a little low), and we get 62%. So far so good. But then Moore goes and adds misleading context, omits relevant context, and adds utter falsehoods, which compromises his position.

Moore starts by claiming that this 62% figure is “more than double the highest federal marginal rate of 28% when President Reagan left office in 1989.” There are three problems with this statement.

First is that the 28% number is wrong. The highest federal income tax rate in 1989 was 33%, for joint incomes between $78,401 and $185,730 (income above this was taxed at 28%).

Second, Moore’s comparing apples to mangoes. I’m sure he’s aware that the 28% figure excludes the sources from which he derived more than one-third of the 62% rate. When the value of deductions born since 1989 (worth at least as much as the 1.9% the Democrats would reverse today), and Medicare and state taxes (the same today as in 1989) are added in, the equivalent 1989 figure is at least 36.5% (and may be more depending on the value of deductions added since). With this number, Moore’s argument would be powerful. But instead he chose to fudge the numbers to make the argument appear better.

The third problem is the assumption that there was something correct about the 1989 tax rates. In 1989, we were seven years into a vast economic expansion. Real GDP had grown by more than 3% each of those years, for a total of 34%. Government spending as a percent of GDP had dropped by nearly 9% from the recession peak. And still we ran a budget deficit of 2.8% of GDP. Any rational analysis would say that tax rates and revenues were too low to be sustainable.

It would be more appropriate to compare the current rate with the potential 62% rate, since what we’re talking about is a change in current incentives (or disincentives, which is what taxes cause). Using Moore’s math, the current total marginal tax rate on top earners is 41.5%, which will rise to 42.4% with the Affordable Care Act increase. This is higher than the 1989 equivalent of 36.4% (when we had high growth and weren’t trying to balance the budget) and lower than the Clinton-era equivalent of 48.9% (when we had high growth and were reducing the deficit).

Moore then discusses capital gains taxes, which would rise if every tax increase mentioned by every Democrat were enacted to a maximum of 23.8%. But Moore doesn’t compare this with 1989. Perhaps that’s because capital gains were taxed at significantly higher rates in 1989 than today.

Then Moore states: “After the landmark Tax Reform Act of 1986… the highest combined federal-state marginal tax rate was about 33%.” Not true at all. Starting with the top marginal rate of 33% described above, adding in the payroll taxes Moore includes in his 62% number, the deductions that didn’t exist in 1989, and the same average state income tax rate, and the 1989 number is at least 41.4%. Again, still a good argument for Moore. But apparently not good enough.

Moore then spews out some misleading statistics about tax rates around the world. He compares a top marginal tax rate in the U.S. to a worldwide average rate. It all leads to this blockbuster of mendacity:

“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.”

Two problems here. First, as I described above, in the late 1980s we had an economy on fire and still ran annual deficits on the order of 3% of GDP. Tax rates and revenues were too low.

But more importantly, this statement is patently untrue. The Heritage Foundation’s Index of Economic Freedom indicates the U.S. tax burden as a percentage of GDP is 26.9%. Among the world’s 30 largest economies, 12 are also in the top 30 in terms of per capita GDP. Of the world’s largest economies with the highest incomes, only Taiwan has a lower tax burden than the U.S., and only Japan, Australia, and Canada have tax burdens that are less than 25% higher than ours. Spain, the UK, the Netherlands, Germany, Italy, France, and Belgium all have much higher taxes than us; the burden in the last four is more than 50% higher than ours.

Not satisfied with this whopper, Moore then drops another context-free nugget:

“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%).”

The obvious missing context here is income share. The OECD study cited by the Tax Foundation for this data is riddled with data showing that the income distribution in the U.S. is much more unequal than in any of these other countries. For example, this chart from the same paper shows that the U.S. median income is 4th highest, 37% above the 30-country average. But the income level of the bottom 10% of Americans ranks 20th, 18% below the 30-country average, while the top 10% in America rank first, making 74% more than the 30-country average. Income disparity helps to explain the tax disparity Moore trumpets.

This is a subject for another day, however.

http://econologos.wordpress.com/2011/05/26/stephen-moores-62-tax-rate-how-to-ruin-a-decent-argument/

My point in all of this is that there may be good arguments against this or that tax proposal. Use them. Just don't use obviously misleading numbers up front, then bury a closer (but still inaccurate) comparison further in the article. He had a pretty good argument going, he just couldn't resist fudging the numbers to make his argument look stronger than it was.

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He did get this right.

Democrats have repeatedly stated they only intend to restore the tax rates that existed during the Clinton years.

From 2008, here's Austan Goolsbee:

0:35 - 0:52

Our economy was already considered to be in "crisis" at this point in 2008.

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Some rhetorical sleight of hand going on here:

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.

So it adds up some unnamed state's top tax rate with the federal rate to get to 62% as a top marginal rate on some incomes and then compares it with ONLY the federal rate from 1989. That's dishonest.

But it gets worse. That 62% isn't even just comprised of federal and state income tax rates. They took the top marginal state and federal income tax rates, added in a bunch of other taxes that aren't classified as income taxes and then compared that figure to only the federal income tax rate in 1989.

That gives a highly skewed comparison. For the comparison to be legit, they'd need to go back to the highest state income tax rate in 1989 and add that to Reagan's 28% federal rate, then add in payroll taxes (including the employer's share just as they did for the 62% figure) as they were in 1989 plus any other similar miscellaneous taxes that existed back then that perhaps don't exist now.

But, is 62% a reasonable tax bracket for anybody? Why would anybody take a risk at starting a new business if every extra dollar will be taxed at 62%?

Even if you consider a single person making a lower middle class salary of $35000, the tax rates are ridiculous on every additional dollar.

Federal 25% + State 5% + Social Security 12.4% + Medicare 2.9% + City 1% = 46.3%. That's crazy!

Owners of small businesses get half of the SS and Medicare tax back as a deduction so they effectively still only pay .0765 for SS and Medicare. If they are an S-corp, C-corp or LLC who has elected to be taxed as an S-corp and thus treat themselves as an employee then payroll taxes are an expense and thus they end up paying less taxes because it decreases their profits and it is not counted as income. Just an FYI.

You don't have a good understanding of how deductions work. You are equating a deduction to a credit.

duh, taxes are an expense. That doesn't mean they were not paid.

In addition to that, if a corporation leaves the profits in the corporation instead of distributing them as income, they will be taxed twice - one at 35% and then again at the personal income tax rate.

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