Marginal Tax Rates Will Rise
By David Henderson
As I have been saying for the last month or so, when I saw the details of the tax rebate (and I’m sure other marginalists have been saying so too), under the “stimulus” bill that President Obama will sign today, marginal tax rates for some of the most-productive people in the world will rise.
That’s what happens when the government gives a rebate or a tax credit and then phases it out above some income level. Marginal tax rates rise for the range of income in which the phaseout occurs. This happened in the 1997 Clinton tax bill too, and I wrote about it in Fortune. Unfortunately (pun intended), the headline that Fortune gave it was “Tax Bill Increases Taxes.” The correct headline would have been “Tax Bill Increases Marginal Tax Rates.”
How much will marginal tax rates increase? The Wall Street Journal gave the data today. For single taxpayers (the WSJ says “workers” but I’m not sure you need to work to qualify) , the rebate phases out after $75,000 of income by $20 for every additional $1,000 of income. The tax credit for singles is $400. So for singles in the income range from $75K to $95K, marginal tax rates in income will be two percentage points higher. For married taxpayers, the tax credit is $800; it phases out after $150,000 of income by the same $20 per $1,000 of income. So for married taxpayers with income between $150,000 and $190,000, marginal tax rates will be two percentage points higher. Of course, singles making between $75K and $95K and couples making between $150K and $190K are among the most productive people in the country and, therefore, in the world.