Democrats are proposing to pay for a one-year extension of the payroll tax cut by increasing the top tax rate by 1.9 percent. This means that as soon as 13 months from now the top federal rate could reach nearly 46 percent. No matter how much money someone makes, the government should not be able to take nearly half of what they earn – especially not on top of all the other taxes Americans pay, like property taxes, sales taxes, gas taxes and other taxes and fees.
The problem is not that Washington is taxing too little, it is that Washington spends too much. If the payroll tax cut is extended, it should be paid for with spending cuts, not with job-killing tax hikes that weaken our economy.
1. Under current law, the top federal income tax rate is scheduled to increase to 39.6% in 2013. However, there will also be an additional 1.2% effective marginal tax rate due to the Pease limitation on itemized deductions and a 3.2% net marginal rate from the Medicare payroll tax. The Democrats are now proposing an additional surtax of 1.9% on income exceeding $1 million, bringing the effective top federal rate to 45.9%. (Note that the top Medicare payroll tax rate is 3.8%, but 1.45% is deductible against income.)
2. The average top combined state and local rate for 2011 is 6.0%. When accounting for deductions against federal income, the net effective rate is 3.6%. Source: Ways and Means staff calculations based on Tax Foundation data.