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1 Robert Carroll, The Economic Cost of High Tax Rates 1 (2009)

handle is hein.taxfoundation/ffbicxz0001 and id is 1 raw text is: OUNDATION July 2009 No. 182 FISCAL FACT The Economic Cost of High Tax Rates by Robert Carroll Introduction President Obama appears intent on carrying out his campaign promise to raise tax rates on high- income households, but the surtax proposal that passed the Ways and Means Committee to finance health care expansion goes much further than most had anticipated. This is a policy to be wary of. High tax rates come with a high economic cost, they raise less revenue than the casual observer might think, and they fall heavily on the entrepreneurial sector. Moreover, they do little to address the more fundamental explanation for the widening gap between rich and poor: the globalization of labor markets. How High Will Rates Go? President Obama's budget will allow most of the Bush tax cuts for those earning over $250,000 to expire on schedule in 2011, sending the top tax rate back up from 35 to 39.6 percent. Also, the so- called PEP and Pease1 rules will be restored, increasing by several more percentage points the effective marginal tax rate (the tax people pay on the last dollar of their income). These changes raise tax rates back to what they were during much of the 1990s, as the Obama campaign promised. House Ways and Means Committee Chairman Charles Rangel (D-NY), however, has proposed that tax rates be increased even further through a new high-income surtax. The surtax would increase the top tax rate for couples with more than $1 million in adjusted gross income (AGI) by another 5.4 percent.2 Taken together, these changes would raise the top federal tax rate to above 46 percent, increasing tax rates to nearly what they were in the early 1980s (see table below).3 Adding state income taxes-which average roughly 6 percent-means that some taxpayers would see the top tax rate rise above 50 percent.4 With these tax hikes, the top tax rate increases by 27 percent, and the after- tax reward from earning income-what taxpayers get to keep after paying taxes-drops by 17 percent.

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