President Joe Biden and Congressional Democrats want to impose the highest income tax in the developed world.
By John Kartch, Americans for Tax Reform
Under the Democrat multi-trillion-dollar tax and spending bill, the average top income tax rate will reach 57.4 percent, according to an analysis by the Tax Foundation. This would be the highest rate in the Organisation for Economic Co-operation and Development (OECD), where the average income tax rate on personal income is just 42.6 percent.
Taxpayers in eight states and the District of Columbia would face rates exceeding 60 percent, as the Tax Foundation notes. For instance, New York taxpayers would face a 66.2 percent top rate, while California taxpayers would face a 64.7 percent top rate. Even in states with no income tax, like Florida and Texas, taxpayers would still face a top rate of 51.4%.
The Democrats’ reconciliation framework currently includes a “millionaires’ tax,” a surcharge on modified adjusted gross income (MAGI). This is a tax on all the income earned by a taxpayer before it can be reduced by existing deductions and credits. If a taxpayer’s MAGI is above $5 million ($10 million for joint filers), they would face a 5 percent surcharge on the income. If their MAGI is above $12.5 million ($25 million for joint filers), they would face an additional 3 percent charge, facing a total 8 percent surcharge.
This tax increase will hit small businesses that is organized as sole proprietorships, LLCs, partnerships, and S-corporations. These “pass-through” entities pay taxes through the individual side of the tax code. Of the 26 million businesses in 2014, 95 percent were pass-throughs. Pass-through businesses also account for 55.2 percent or 65.7 million of all private-sector workers.
A significant portion of business income is paid through the individual side of the tax code. As noted in a Senate Finance Committee report, “in 2016, only 42 percent of net business income in the United States was earned by corporations, down from 78.3 percent in 1980.” To be clear, this is a tax hike on individuals and businesses.
Under the same framework, Democrats would also impose the third-highest top marginal capital gains rate in the OECD. This is because the aforementioned 8 percent tax would also apply to capital gains income. This results in a 31.8 percent top marginal capital gains tax rate. Once the average state capital gains rate is included, the U.S. rate rises to 37 percent, the third-highest in the developed world behind Denmark (42 percent) and Chile (40 percent).
The capital gains tax imposes double taxation on corporate income – first, businesses pay the corporate income tax on their earnings. Second, the investor pays the capital gains tax on dividends received or stocks when they are sold. This double taxation discourages savings, suppresses productivity, and discourages investment. Ultimately, this tax hike will threaten business creation, business expansion, entrepreneurship, and jobs and wages.
It could also reduce retirement savings, as millions of retirement accounts are linked to the stock market.
A capital gains tax hike could even reduce federal revenues in the short term. Because the tax only applies when a taxpayer sells the asset, a high capital gains rate discourages individuals from selling in order to delay having to pay the tax. Historically, when the capital gains tax was cut, revenue increased. When the capital gains tax is low, investment increases, stock prices increase, and revenue goes up. The inverse is of course true.
Democrats are not proposing taxing Americans like Europe but instead are trying to impose tax rates that are more confiscatory than European rates. Lawmakers should reject these tax hikes, as they will ultimately slow growth, shrink wages, reduce Americans’ retirement savings, and depress investment.
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