NCPA - National Center for Policy Analysis


January 30, 2007

In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson found that when including state income taxes, sales taxes and the offsetting benefits of major government programs, our all-in marginal tax rate is pushing 40 percent, says economic columnist Scott Burns.

This, however, is not our average tax rate, says Burns.  It is what most workers will pay on each additional dollar of income when all taxes are considered.  But what it translates to is a bumpy flat tax:

  • The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3 percent, the median tax rate is 41.8 percent and the standard deviation of all those rates is 5.3 percentage points.
  • Basically, this means everyone pays about 40 percent, plus or minus 5.3 percentage points.
  • For example, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5 percent, while a 45-year-old couple earning $500,000 pays at 43.2 percent.
  • That's not a big range, particularly when you notice that it covers an income rise of 2,500 percent.

If this seems improbable, consider how easy it is to hit 40 percent, says Burns:

  • Just be self-employed (so you're paying the full 15.3 percent Social Security tax) and earn enough (anything over a taxable $31,850 single, $63,700 joint, or $42,650 head of household in 2007) to hit the 25 percent federal income tax rate.
  • Adding the two taxes (Social Security and income), and there you are, paying 40.3 percent on each additional dollar of income. 

Source: Ken Burns, "Flat tax already a reality," Dallas Morning News, January 28, 2007.


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