Under Obama, Total Taxes on Labor Could Reach 60 Percent?

Tuesday, June 17, 2008

BARACK OBAMA

A couple of days ago, I added the numbers on Obama's tax proposals in a back-of-the-envelope manner and concluded "we're really looking at a top tax rate of 53.45 percent to 54.9 percent for top earners." (A few accountants wrote in and said the complications of the tax code make it tough to make a precise percentage like that.)

Guys much smarter than me at the Tax Policy Center (via Instapundit, via Kaus) have come to a similar conclusion:

Combine [Obama's Social Security tax proposal] with a top income tax rate of 39.6 percent, the phase-out of itemized deductions—which Obama would like to revive and which amounts to an implicit 1.2 percent surtax—and state income taxes, which typically run around 6 percent, and the total tax on labor would be close to 60 percent. In high-tax states like California and New York, the top rate would be even higher. Such high rates would provide an enormous incentive to hide income from the IRS or make earnings look like capital gains (which Obama would continue to tax at far lower rates than other income) or business profits (which are subject to income tax but exempt from payroll tax).

(Note that Paul Krugman is wondering why Obama's proposal hasn't gotten more attention, as it would "push tax rates on some high-income Americans back to the levels of the 1970s." Paul Krugman! I knew he preferred Hillary to Obama; looks like he hasn't jumped on the bandwagon yet.)

As previously noted, the highest tax bracket kicks in at an annual taxable income level of $357,700 in 2008. Obviously, if you're making that salary, you're doing pretty darn well for yourself. But is the federal government entitled to take $196,377.30* or so?

* UPDATE: Tax-savvy readers write in:

I’m sure many, many readers will already be e-mailing you about this, but even if you make $350K + and your marginal tax rate is 60%, that doesn’t mean 60% of your income goes to taxes, only 60% of every dollar you make above $357K (in taxable income, net of deductions etc.). The distinction is between the marginal tax rate (60%) and the average tax rate (a dollar-weighted average of all marginal rates, and much lower).
There’s also one other point you can add to your excellent discussion of this issue (the point above is a quibble)- in addition to the negative economic impacts associated with a higher tax burden and fewer incentives to work and invest, there’s little doubt that the actual tax revenues resulting from higher tax rates will much lower than the government projects. High wage earners have lots of ways to move income around and keep it away from the taxman – being paid in stock options rather than cash, forming S corporations and calling your income “dividends” rather than earnings (thus getting around the higher social security and medicare taxes), almost unlimited contributions to 412i plans. Obama’s tax hikes will lead to a burst of entrepreneurial activity that is misdirected towards avoiding taxes rather than doing anything productive.

Another reader puts the number lower, at least for that income level:

Your numbers are for a worst case individual scenario, as well, as all non-self-employed would have a max tax rate AFTER $357,700 of ~44.5%.
An argument can be made that ~44.5% (or 55% for self-employed) federal tax rate is too high for the rich (yes, I define an individual making more than $357,700/yr as rich), but by misleading your readers on how much an individual might pay on a given income, you don't advance that argument well.

The $196,377.30 figure is 54.9 percent of the $357,700 figure — in the ballpark for self-employed, less for those employed by others.

06/17 02:14 PM Share