The Obama Rate

By :: July 24th, 2008

Barack Obama’s fiscal policy can be summarized pretty simply: Cut taxes for low- and middle-class Americans, boost spending for education, health care, and alternative energy, and pay for much of it raising taxes on the rich. That’s not the only way he’d finance his ambitious plans, of course—he’d also have to borrow $3 trillion and get some money from ending the war in Iraq—but he hopes to generate nearly $300 billion over the next decade just from rolling back the Bush tax rate cuts on high-bracket taxpayers.

The numbers are quite striking, according to a new TPC analysis of the Obama plan: Middle-income families would see their taxes cut by about $1000 annually or 5 percent, while those in the top 1 percent (with incomes in excess of $600,000), would pay $130,000, or about 2.7% more. And that does not include the likely impact of Obama’s still-vague plan to boost payroll taxes on those earning more than $250,000. That proposal alone could increase taxes on those high earners by an additional $400 billion over 10 years.

Taxing the rich may be a political winner, but it runs the risk of creating some big economic problems. TPC figures Obama could boost the top effective marginal income tax rate to 46 percent, assuming a 2 percent payroll tax increase. In a high-tax jurisdiction such as New York, the combined state, city, and federal rate would top 50 percent. If high-earners have to pay the full Social Security payroll tax, their rates could approach 60 percent.

We’ve seen those rates before—they have been as high as 90 percent-- and we’ve got a pretty good idea what happens. When labor is taxed that much, wealthy people will find a way to turn ordinary income into capital gains and dividends, or to defer income. The result: At these levels, rising rates generate tax avoidance, not more revenue.

John McCain argues that these high rates will hurt small business most, but that claim is shaky. Fewer than 2 percent of taxpayers with business income are in the top bracket. These entrepreneurs may aspire to millionaire-hood, but most will never get there.

Still, Obama’s effort to make the highest income Americans pay for more of government through higher tax rates will not come without a price.


  1. Anonymous  ::  11:13 pm on July 24th, 2008:

    When “labor” is taxed that much? Are you including CEO pay packets in the “labor” category? I'm not saying that is illegitimate, it was the mantra of the Republicans before the Great Depression, that working for a living included all jobs. (Gerring, 1998, Party Ideologies in America 1828-1996, pp. 59-64)
    It is certainly the case that, as taxes increase, the dodges increase. Other arguments say that the steeper the penalty for any crime, the greater the deterrent.
    Personally, I think the tax code should get increasingly progressive, even after annual incomes of 1 billion dollars. I like to use a conic section formula for tax rates.

  2. Anonymous  ::  6:51 pm on October 5th, 2010:

    Their is no reason the rich need more tax breaks than the low or middle class, it is an affront to the American people that this has been going on for so long. The rich as well as the common American people all have a part in this country.

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