Over at AEI, Mark Perry put together a chart that got a lot of attention yesterday. The chart shows that for the first time ever, Americans are spending more money at restaurants and bars than they spend at grocery...
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The Obama Tax Plan: High Tax Rates Are Not Just for High-Income Taxpayers
One feature of the Obama tax plan that is beginning to get more attention is the high tax rates that will be imposed on those with high incomes. A simple back-of-the-envelope calculation gets one to a nearly 50-percent tax rate, rates that have not been seen since before the Tax Reform Act of 1986.
The calculation is straightforward: Obama's 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemptions and certain itemized deductions for high income taxpayers.
What is much less widely known is that Senator Obama would raise tax rates on low- and middle-income taxpayers as well, lest anyone feel left out. A recent analysis by Alex Brill and Alan Viard demonstrates this quite clearly. In their "city-scape" chart, a dotted blue line shows the marginal tax rates that people face now, and a solid red line shows what those tax rates would be if Obama's tax plan were enacted.
Note that this chart only considers married couples (with two children, a college freshman and a 12-year-old receiving after-school care) with income between $25,000 and $125,000; that is, it leaves out those at the very bottom of the income distribution and those with high incomes. Even though much of Senator Obama's tax plan is aimed at providing targeted tax relief to those with low and moderate incomes, the methods he has chosen to deliver that relief causes their marginal tax rates to rise. Relatively low income taxpayers, those with incomes below $45,000, would face tax rates upwards of 35 to 40 percent. Middle income taxpayers with incomes in the $105,000 to $125,000 range also see their tax rates rise to upwards of 45 percent. Only a narrow band of couples earning between $85,000 and $100,000 escape the economically damaging effect of the Obama plan's higher marginal tax rates.
Of course, the damaging effects of high marginal tax rates are well known: they are a disincentive to work, produce and save. They shrink the size of the tax base and discourage entrepreneurship. Fundamentally, they cause businesses and households to make decisions based more on tax considerations than economic merit.
But, the chart above only tells part of the story: it only includes individual income taxes. Add another 15.3 percent (employer and employee share) in Social Security and Medicare taxes for those under the wage cap (expected to be $106,800 in 2009). So the real kicker is that under Senator Obama's tax plan, some low-income taxpayers will face combined income-payroll tax rates between 50 and 55 percent. This looks more like a return to the tax policies of the 1970s than a tax system for the 21st century.
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