Wednesday, January 02, 2013

The V-shaped nature of the Fiscal Cliff Fix

Here is a first approximation of the change in effective tax rates [for a single taxpayer] as a result of the deal (the effective rates   are based on changes in payroll and income taxes).


The builds in a 2 percentage point increase in payroll taxes us to the income cap of $110,100, and a 4.9 percentage point increase in marginal tax rates above $400,000.  The rates actually rise a teeny bit faster for those above the $400,000 threshold, because the tax on capital gains is increasing by 5 percentage points, but this doesn't change the basic point of the picture, which is that it is not until income reaches around $560,000 that the change in effective tax rates at the high end of the distribution match the rate at the low end. [note: y-axis is the change in effective tax rates].

8 comments:

PJR said...

Is this for a single taxpayer? If married/filing jointly, the 2 percent increase would also apply to wages earned by a spouse--potentially, to combined wages up to $220,000. In this case, the sudden drop-off would shift to the right and be steeper.

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Jardinero1 said...

The chart labeled ambiguously. It says change in tax rates at the top, but effective tax rate on the side. Does the chart show tax rates or change in tax rates?

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