Unexpectedly Intriguing!
September 20, 2010

On 15 September 2010, Greg Mankiw asked "How much would the President raise the top tax rate?" He quotes what he found:

Here's the answer:

In 2010, the top income tax rate bracket for ordinary income is 35 percent. Besides wages and interest income, this income category includes profits from pass-through business firms—sole proprietorships, partnerships, and S-corporations.

Under the president’s proposal, the top bracket will rise to 39.6 percent. A stealth provision that phases out high-income taxpayers’ itemized deductions will also be reinstated, adding another 1.2 percentage points to the effective tax rate, bringing it to 40.8 percent. Wages and some of the pass-through income will also remain subject to a 2.9 percent Medicare tax. These 40.8 and 43.7 percent tax rates, which will apply in 2011 and 2012, match the 1994 to 2000 rates—the same top bracket, stealth provision, and Medicare tax were in place then.

But the picture changes in 2013. Under the healthcare law adopted in March, the Medicare tax will rise that year, from 2.9 to 3.8 percent. Also, a new 3.8 percent tax, called the Unearned Income Medicare Contribution (UIMC), will be imposed on high-income taxpayers’ interest income and most of their pass-through business income that’s not subject to Medicare tax. So, under the president’s proposal, virtually all of top earners’ ordinary income will be taxed at 44.6 percent, starting in 2013.

On 10 December 2009, here is what we predicted:

If the Obama administration holds to the recent practice of U.S. politicians of keeping near the lower margin, the expected national debt burden for 2011 of 2.9 indicates that the top marginal income tax rate will increase to roughly 44-45%.

Want to test drive our predictive model for yourself to see what the effects of raising the top income tax rate in the U.S. will have on you? It's built into the Independent Institute's MyGovCost calculator!

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