For those who are focused on the near-term debt limit talks and the swirl that accompanies it, let me throw out a word of caution: the Democrats are salivating over the potential for 70%+ marginal tax rates.  Let me explain how a portion of the tax-paying public could reach those:

First, for those unsure of what a “marginal tax rate” is, it is the rate of taxes for the last dollar earned.  Let’s start with the current top federal tax bracket is set at 35% which will rise (with no action) to 39.6% in 2013.  This could be adjusted higher by two points due to phase outs of some itemized deductions for high-income earners – remember those evil income earners over $200K ($250K for joint filers).  The payroll tax is 12.4% capped to the first $106,000 of income and tack on another 2.9% for Medicare taxes.  If we add in state taxes (Hawaii’s top rate is 11%, California’s is 10.3% and many states max out around 9%) and adjust the marginal rate for the deduction of state taxes, this nets out to about 44% as the top marginal tax rate.  Then we need to add in the 0.9% increase to the payroll tax for ObamaCare and his proposal to uncap the Social Security taxes, this would net out to a bit over 58%.

For a single filer in 2011 whose net income is $50K, they’ll get hit too.  They fall into the 25% tax bracket, then add the payroll tax at the new 15.3% and a state rate of 9.3% (California’s rate for this income bracket – see here) and this $50K a year earner is paying a marginal rate of almost 50% (49.6).  Half of every dollar earned at the end of the year (essentially) goes to the government. 

So, the Democrats could be getting what they want all along – a raise in taxes…but it won’t just be on those evil rich.

GorT

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