Highest U.S. Marginal Tax Rate is Too Damn Low
With Tax Day just around the corner, it is a good time to put post-WWII top marginal tax rate into context. Many find it hard to believe that the top rate was 91% during the Eisenhower years. No, that didn’t mean that high earners paid a 91% tax on all of their income.
Take the 2022 tax brackets for single filers. The lowest rate is 10% and applies to taxable income (after deductions) up to $10,275. The first $10,275 is taxed at the same rate for everyone regardless of whether total taxable income is $10,000 or $750,000. The same logic applies to each successive tax bracket.
The highest marginal rate this year is 37%, which only applies to each dollar above $539,900 for single filers. So, for taxable income of $539,901, the top tax rate would be assessed on $1.00 for a tax of 37 cents. Income that is millions above the $539,900 threshold is all taxed at the same 37%. Given rate increases for much lower levels of income, this seems unfair.
For the last three decades, the mainstream policy debate around the top rates has centered around the difference of, at most, a few percentage points. As the figure shows, the Bush tax cuts (2001-03) lowered the highest rate from 39.6% to 35%. Obama set them back to 39.6% (2013) before Trump moved them to 37% (2018).[1] President Biden’s income tax plan continues the trend over the last three decades, as it would return the top rate to the Obama-era 39.6% for single filers earning over $450,000. The best research from Saez and Zucman pegs the optimal federal marginal income tax rate around 60% – though this depends on enforcement and avoidance factors, this optimal rate is leaps and bounds away from the modern-day seesaw of a couple percentage points.
While no single tax change can solve the issue of fairness and revenue for things both needed and nice, progressive tax changes across corporate, capital gains (20% top tax rate!), personal income (federal and state[2]), estates, and wealth together can change the landscape of the country. Current tax structures starve investments in our aging infrastructureand other public goods like healthcare, education, childcare, and veteran care. Inequality continues to soar and the richest Americans and corporations are not paying their fair share. Bold progressive policies across all taxes are necessary to invest in people, their communities, and to reflect our values at a level commensurate with our vast national resources and wealth.
Notes.
[1] Clinton did not change the top rate but removed the cap on Medicare taxes. Obama also added a 0.9% surcharge to high income earners. Together, they add 3.8 percentage-points to the top marginal rate.
[2] State taxes vary widely with many implementing cuts, nine states have no personal income tax. Other states have more progressive policies. For instance, California has a top state rate of 13.3% with an additional 1% on income above a million dollars
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