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Stimulus Package Ratchets Up Marginal Tax Rates

Yesterday, Congress passed a "stimulus package" that gives rebates to many people who don't work, but denies them to people who do work but whose earned income exceeds $75,000 for single people and $150,000 for married couples. As a result, a few people with incomes above those amounts will face marginal tax rates of over 60 percent. (I discussed earlier how this package will increase the deficit and not stimulate the economy). The provision in the stimulus bill phasing out rebates for people whose incomes exceed those arbitrary limits increases the marginal tax rate to well over 50 percent for some such taxpayers, especially small business people who are self-employed (that is, when you add up their federal, state, and municipal income taxes, and self-employment tax, and factor in their alternative minimum tax and income-triggered itemized-deduction phase-outs). A married couple making $150,000 in taxable income pay a 28 percent marginal tax rate to the federal government, plus up to 9 percent in state income taxes (it's 9% in Oregon and 9.3% in California), and up to 4% in city and county income taxes (New York City, for example, charges 3.648%). On top of that, if their income comes from a small business, they pay a 15 percent federal self-employment tax as well, plus business licensing and income taxes to their municipality. (For example, Portland, Oregon charges small business owners a 1.45% rate). Thus, some taxpayers already face marginal tax rates of well over 50 percent. In addition, they will now have their "rebates" phased out if they earn much beyond the $150,000 limit, totally phasing out such rebates if they earn $174,000. If their rebate under the stimulus plan would have been $2400 (for 2 parents at $600 a piece and 4 children at $300 a piece), then their rebate would be phased out at a rate of $1 for every $10 earned -- a 10 percent rate, to add to their existing marginal tax rate of over 50 percent. Moreover, even prior to the stimulus plan, many taxpayers with household incomes over $150,000 had their marginal tax rates increased by obscure provisions of the tax code. First, the tax code starts phasing out taxpayers' itemized deductions (for things like state and local taxes) if their income exceeds $156,400, adding additional taxes for every dollar they earn, even beyond the official marginal tax rate. Second, the alternative minimum tax (AMT) begins applying to many taxpayers in this range, requiring them to pay AMT on each additional dollar they earn. Those two tax code provisions further increase the marginal tax rate of people already being denied rebates in subtle ways. Thus, some small business owners will face a marginal tax rate that exceeds 60 percent. That's one more reason not to start a business and stimulate the economy.