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1 Gerald Prante, Top Marginal Effective Tax Rates by State under Rival Tax Plans from Congressional Democrats and Republicans 1 (2010)

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September 22, 2010
No. 246                        ..L ..
Top Marginal Effective Tax Rates By State
under Rival Tax Plans from Congressional
Democrats and Republicans
By Gerald Prante
Introduction
One of biggest news stories across the nation is what Congress should do about the expiring Bush-era
tax cuts. Should they be extended for everyone as Republicans favor? Or should they be extended for
everyone except those at the top of the income spectrum, as Democrats (including the President)
favor? The debate is ever-focused on this top 2-3 percent of the income spectrum.
The most clear-cut distinction between the Republican and Democratic plans is how high the top
ordinary tax rates should be. The Democratic plan calls for allowing the top two ordinary tax rates to
rise from their 2010 levels of 33 percent and 35 percent to their scheduled 2011 levels of 36 percent
and 39.6 percent, respectively. The Republican plan calls for extending the lower 2010 levels.
The two parties' tax plans also differ on what tax rates should be imposed on capital gains and
dividends of high-income people, as well as over whether we should restore the limitations on
itemized deductions, which over the phase-out range, impose an implicit 1 percentage point surtax on
adjusted gross income.
The Costs and Benefits of Higher Tax Rates on High-Income Taxpayers
Empirical evidence tends to suggest that raising marginal tax rates on those at the top of the income
spectrum is one of the most economically inefficient ways of raising tax revenue due to the higher
sensitivities to taxation among those at the top, along with the fact that as statutory rates rise, the
deadweight loss of taxation rises more quickly.1
Most public finance economists would agree that, in a relative sense, the sensitivities of labor to
higher taxes are greatest at the high end of the income spectrum (along with second earners).
For a good overview of this issue, see What Does the Taxable Income Elasticity Say About Dynamic Responses to Tax Changes?
by Carroll and Hrung at http://ideas.repec.org/alaea/aecrev/v95y2005i2p426-431.html or The Elasticity of Taxable Income with
Respect to Marginal Tax Rates: A Critical Review by Saez, Slemrod and Giertz at http://elsa.berkeley.edu/-saez/saez-slemrod-
giertzJEL09elasticity.pdf.

Gerald Prante, Ph.D., is senior economist at the Tax Foundation.

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