Paul Ryan’s Suicidal Marginal Rates Argument
Congressman Paul Ryan’s speech to the Economic Club of Chicago had a new wrinkle; in it he claimed that Obama wants to raise the top rate to 44.8%. While he doesn’t say how he reaches that number, Glenn Kessler of The Washington Post’s Fact Checker did some digging and got Ryan’s staff to explain. To get to this figure, Ryan uses the expected 39.6% Clinton-era top bracket, plus a limit on exemptions and deductions that has lapsed and would be reinstated, plus the 0.9% Medicare tax on high earners starting in 2013 that is included in the health care law, plus a “net” 2.3% from the Medicare payroll tax.
This is the first time I’ve ever seen a Republican include payroll taxes to determine a total federal tax rate. This is a dangerous tack, since as Kessler notes Republicans like to talk about how many people pay no income tax at all. Everyone who works pays payroll taxes.
But this argument isn’t dangerous to Republicans because it shows that the working poor actually do pay taxes. It’s dangerous because it shows that the middle class tax burden is much higher, relative to the very rich, than most people realize.
Payroll taxes have two elements, both paid by the employer and the employee. The Medicare tax is 1.45% of all earned income, and the Social Security tax is 6.2% of earned income up to $106,800. To get his “net 2.3%” Medicare tax, Ryan makes the reasonable assumption that absent the tax, employee compensation would be somewhat higher. This holds true for every part of the labor market. Applying the same math to the Social Security part of payroll taxes, the “net” Social Security tax rate is 12.1%. So this is the lowest federal marginal tax faced by any American (intentionally not counting the effects of the Earned Income Tax Credit).
Now let’s apply this to somebody in the unluckiest segment of the middle class. Imagine an unmarried person making $100,000 who doesn’t have many deductions. Her total marginal federal tax is the “net” payroll tax of 12.1% described above, plus her income tax rate of 28% (on income over $83,600), or 40.1%. This person has an unmarried co-worker making $70,000 who also takes the standard deduction; his total marginal federal tax rate is 37.1% because he falls in the 25% bracket.
Now compare this with the rates paid by the CEO with the $3.5 million salary: 2.3% net Medicare tax plus 35% income tax = 37.3%.
So based on current tax law, the CEO faces a roughly equivalent or lower total federal marginal tax rate than his employees, while making 35-50 times as much money, or more.
Then there is the very wealthy person whose income comes solely from dividends and capital gains. This rate is capped at 15%, total, and is not subject to Social Security or Medicare taxes. This is why Warren Buffett famously pays a lower percentage of his income in tax than does his secretary.
Seems to me this is not an argument Republicans should not want in the dialog.