Dem Plan Will Impose Highest Income Tax Rate in Developed World

Americans for Tax Reform:

President Joe Biden and Congressional Democrats want to impose the highest income tax in the developed world.

Under the Democrat multi-trillion dollar tax and spend bill, the average top income tax rate will reach 57.4 percent, according to an analysis by the Tax Foundation. This would be the highest rate in the Organisation for Economic Co-operation and Development (OECD), where the average top income tax rate on personal income is 42.6 percent.

Taxpayers in eight states and the District of Columbia would face rates exceeding 60 percent, as the Tax Foundation notes. For instance, New York taxpayers would face a 66.2 percent top rate, while California taxpayers would face a 64.7 percent top rate. Even in states with no income tax, like Florida and Texas, taxpayers would still face a top rate of 51.4%.

The Democrats’ reconciliation framework currently includes a “millionaires’ tax,” a surcharge on modified adjusted gross income (MAGI). This is a tax on all the income earned by a taxpayer before it can be reduced by existing deduction and credits. If a taxpayer’s MAGI is above $5 million ($10 million for joint filers), they would face a 5 percent surcharge on the income. If their MAGI is above $12.5 million ($25 million for joint filers), they would face an additional 3 percent charge, facing a total 8 percent surcharge. 

This tax increase will hit small business that are organized as sole proprietorships, LLCs, partnerships and S-corporations. These “pass-through” entities pay taxes through the individual side of the tax code. Of the 26 million businesses in 2014, 95 percent were pass-throughs. Pass-through businesses also account for 55.2 percent, or 65.7 million of all private sector workers.

A significant portion of business income is paid through the individual side of the tax code. As noted in a Senate Finance Committee report, “in 2016, only 42 percent of net business income in the United States was earned by corporations, down from 78.3 percent in 1980.” To be clear, this is a tax hike on individuals and businesses. 

Under the same framework, Democrats would also impose the third-highest top marginal capital gains rate in the OECD. This is because the aforementioned 8 percent tax would also apply to capital gains income. This results in a 31.8 percent top marginal capital gains tax rate. Once the average state capital gains rate is included, the U.S. rate rises to 37 percent, the third-highest in the developed world behind Denmark (42 percent) and Chile (40 percent).  

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