It’s hard for me to imagine such a high marginal tax rate, but those kinds of rates were the norm from the 1930s into the 1960s. Higher marginal tax rates extended the Great Depression. But that doesn’t seem to matter to the Senate or President Obama; a researcher believes that the Senate health care proposal by Senator Baucus would lead to 80% marginal tax rates.
Jim Capretta looks at the Baucus healthcare bill and concludes that, because the subsidies phase out as income rises, it imposes an effective marginal tax rate on income of about 30% for many families. Add that figure to the income tax, the payroll tax, and the phase-out of the EITC and “the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.”
Indeed, Jim seems to understate matters, as he includes only the employee half of the payroll tax. Including both the employee and employer halves, as economic theory says is appropriate, appears to give a marginal tax rate closer to 80%. And, of course, many states impose income and sales taxes as well, and these would further raise the overall marginal tax rate. Jim was doing a rough back-of-the-envelope calculation.
Add in the rationing that’s inherent to socialized medicine and you can see why I believe the proposals from Congress are economic disasters. The one bright spot will be their impact on tax professionals: The higher that taxes rise, the more that individuals will concoct fancy methods of avoiding taxes. That means more business for people like me.
