Wednesday, July 15, 2009

Marginal tax rates exceeding 50%

The House is proposing to fund national health care with a “millionaire” surtax: a tax of 1-2% on those making $350K or more, rising to 5.4% for those making more than $1 million. Some estimate that the tax surcharge will not be enough to pay the projected $100 billion/year cost (which might not allow for a) higher costs than predicted b) people changing behaviors to avoid taxes).

However, assuming the surtax goes through, the Tax Foundation (via Greg Mankiw) calculates that the top marginal tax rate will exceed 55% in eight states — three (Oregon, Hawaii, NJ) at 57+%, three (NY, Calif, RI) at 56+%, and two (Vt., Md.) at 55+%. A full 39 states would be above 50%. The calculations do not take into account proposals to eliminate the FICA cap, currently at $102,000. If this were eliminated, individuals would pay another 7.65%, pushing California up above 64%. (If employers reduced salaries/bonuses to reflect their additional 7.65% share of FICA, it would raise effective marginal rates to 67%).

The Tax Foundation refers to an NBER research paper arguing that even under the current system there’s a strong disincentive for additional work. There’s at least anecdotal evidence that rates above 50% increase the psychological perception that additional work is not a good idea.

Anecdote #1 is “The Taxman” by George Harrison, written when he found out how much a Beatle must pay in taxes:

Let me tell you how it will be,
There’s one for you, nineteen for me,
‘Cos I’m the Taxman,
Yeah, I’m the Taxman.
Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cos I’m the Taxman,
Yeah yeah, I’m the Taxman.

(If you drive a car car), I’ll tax the street,
(If you try to sit sit), I’ll tax your seat,
(If you get too cold cold), I’ll tax the heat,
(If you take a walk walk), I’ll tax your feet.
To be fair, under new policies we’re looking at 1:2 and not 1:19.

I’m curious what this will do to the value of high-end real estate. One of the things that people do when they become more affluent is buy a bigger house, but if “millionaires” are all losing another 5% (or 13%) of their income, will it cause them to spend less on housing, reducing demand and prices? It would probably matter more in suburban NY (where the compensation is bonuses) than here in Silicon Valley (where it’s incentive stock options, currently treated as capital gains).

No comments: