Taxes may rise no matter who wins in November

Tim Darnell

October 9, 2008

Here's a new report from the Tax Foundation that I found very interesting:

Marginal tax rates will rise to over 50 percent on some middle-income families if Sen. Obama's tax plan becomes law, and over 40 percent under Senator McCain's plan.

The report is Tax Foundation Fiscal Fact No. 150, "How Do the Presidential Candidates' Tax Plans Affect Taxpayers' Marginal Tax Rates?" by Robert Carroll, Ph.D., vice president of economic policy at the foundation. Carroll illustrates his point with a family of four - two working adults with two children - and explains the economic importance of "marginal" tax rates and why they can differ dramatically from statutory tax rates.

"Senator Obama's new and expanded tax credits for low-income taxpayers will certainly cut taxes for low-income people," explains Carroll, "but the credits are mostly recaptured from middle-income taxpayers. During this phase-out range, marginal tax rates shoot up, causing economically damaging side effects. As a result, for example, a family of four in the $30,000-to-$43,000 range would discover that for every additional dollar they earn, they pay more than 50 cents in income tax."

The marginal tax rate is important because it determines how much of his income a taxpayer keeps when making financial decisions such as how much to work, save or donate. The higher the marginal tax rate, the more likely it is that these important decisions will be based on tax considerations rather than economic merit.

Sen. McCain's tax plan also changes marginal tax rates by proposing to replace the tax exclusion for employer-provided insurance with a new health tax credit. Although taxpayers would pay less in total, the marginal tax rate would rise in some income ranges.

"Between $15,000 and $20,000, and between $90,000 and $110,000, some families would be bumped up into a higher tax bracket," said Carroll.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.