Even Joe Biden would raise the top marginal rate on work to over 50%
The brawl in President Obama’s second term over raising the top income-tax rate to 39.6% from 35% was centuries ago in political time. One way to tell is that even moderate Democratic 2020 presidential candidates have quietly proposed to raise the tax rate on labor by double digits and it’s received almost no attention. Unlike single-payer health care and wealth taxes, this tax increase could command majority support in a Democratic Congress on day one.
The idea is to increase the Social Security payroll tax, the 12.4% levy that falls directly on labor and is not eligible for deductions. Currently the tax applies to income up to $137,700, split between employer and employee. Bernie Sanders, Elizabeth Warren and Amy Klobuchar want to impose it on all labor income above $250,000. Joe Biden wants it to fall on income above $400,000. Pete Buttigieg says he wants “additional Social Security taxes” on income above $250,000.
Meanwhile, Representative John Larson’s Social Security 2100 Act, cosponsored by 208 House Democrats, would apply the tax to income above $400,000 to finance an expansion of the entitlement. The bill would also gradually raise the payroll tax rate on all workers to 14.8% from 12.4%. As entitlement watcher Charles Blahous notes, that’s a 19% increase in the payroll tax burden. That’s significant for less-skilled workers who don’t earn enough or have too many dependents to pay income tax.
Raising rates on high earners may be less politically toxic but it’s terrible economics. Experts can debate how much the top rate affects the incentive to work for, say, a dentist or an engineer, and whether a two, three or five percentage-point tax-rate increase has an effect on the wider economy. But there’s little doubt a new 12.4% tax would depress incentives and reduce America’s competitive advantage for high-skilled workers and make the tax structure more typical of European countries.
The nearby table borrowed from our friends at Cornerstone Macro captures the magnitude of the tax increases on labor and investment income that Democratic presidential candidates are proposing. The top marginal federal tax rate on labor is currently about 40% including the Medicare tax.
