What’s a ‘Top Marginal Tax Rate’?

BY Paul Solman  December 12, 2011 at 5:23 PM EDT

By Elizabeth Shell

This blog has been updated to clarify that the top table refers to single household incomes in 2012, and the interactive tax calculator below reflects 2010 data for most countries.

The amount taxpayers owe Uncle Sam every year depends on many factors, especially the amount of income they earn. The United States, along with many other countries, has what’s known as a marginal tax rate system — different levels of our income are taxed at different rates. There are only a handful of brackets folks can fall into. Those who pass certain income thresholds pay higher rates on the income ABOVE those thresholds.

The IRS has a surprisingly handy example. For 2012, unmarried individuals can generally expect their federal tax bill to look like this:

A Marginal Tax Bracket Example from the IRS.

Currently, the top rate is sitting at that 35 percent you see above. On Monday’s NewsHour, we examine the history of what America’s richest have paid over the years. Right now a debate is raging in Washington over exactly how much the wealthiest — those earning enough to be at or above the top marginal tax rate — should pay. President Obama would like to let the Bush-era tax cuts expire, thereby raising taxes on the top bracket to the 39.6 that prevailed under Presidents George H.W. Bush and Bill Clinton. Republicans have almost universally proposed keeping the top marginal income tax rate at 35 percent, if not lowering it.

The OECD compiles all sorts of tax data for its nearly three dozen member countries. We thought it would be interesting to see how an American income would be taxed at different countries’ marginal tax rates. Simply enter an income and select a country from the list, and you’ll see a breakdown of how your income would be taxed.

Keep in mind that our purpose here is to illustrate marginal tax rates, not to provide tax advice. Also, marginal tax brackets in the United States change as filing types change — from single to married filing jointly, for example. This interactive neither takes into account state and local taxes, nor tax credits, such as for children and education. And Matthias Rumpf of the OECD office in Washington, D.C. adds a word about how these comparisons should be interpreted:

“In many countries, other things are included in these taxes. Universal health insurance, for example, is paid for by these taxes in the UK and Denmark, but that’s not exactly the case in the U.S.,” he told us.

If you find yourself surprised by the top rates taxpayers are asked to cough up, here’s a preview of Monday’s piece with some provocative bits from Columbia Law School Tax Professor Alex Raskolnikov.

Alex Raskolnikov: Herbert Hoover presided over the largest tax increase in peace time history of the United States. For top earners the rate went up from 25 percent to 63 percent. But not everyone in top 1 percent was paying 63 percent. In fact after the Hoover tax increase, there was a very wide range in rates between people who just barely made the top 1 percent and people who were like Andrew Mellon, like really, really the richest Americans. The range was from 8 to 63 percent. So people who just made it into the top 1 percent were facing the 8 percent rate — that was not particularly high. The wealthiest of the wealthy of the wealthy were facing 63 percent. And this is 1931!

Paul Solman: Do you read anything into this? I mean, that perhaps the Great Depression continued for another nine years because rates were jacked up that high?

Alex Raskolnikov: Well, as always my answer is going to be that we’re not entirely sure, and it’s complicated, and there were many factors going into Depression. Tax policy was only one of them, so it’s hard to know. But I would say that this range of rates for top 1 percent from 8 to 63 percent is kind of illuminating about the debates that are going on now. When you think about Warren Buffett, who says that he thinks we should raise taxes to top 400 taxpayers, and the debates in Congress about raising taxes on those with an income over a million dollars, that’s about 400,000 to some arguments that the top rate should go up for the top 1 percent, that’s over a million taxpayers. To Obama’s points that we should let Bush tax cuts expire for people with income of $200,000 that’s well below, quite below top 1 percent. That’s the kind of differentiation that we don’t have now that we used to have and that was very profound when Hoover raised the rates.

In 1944 the average rate paid by the top 1 percent of households was 60 percent — meaning that these people paid 60 percent of their income in taxes. But that’s not all. [President Franklin D. Roosevelt] actually wanted more. So in 1942 he suggested capping incomes at $25,000. Today that would be $350,000. That’s a little under where today’s top marginal rate starts. And it wasn’t kind of a backroom discussion in the White House, he made this suggestion to a Joint Session of Congress in 1942.

Paul Solman: That’s literally unimaginable today, right? I mean a totally different ethos.

Alex Raskolnikov: I agree, and that wasn’t the only suggestion. At some point FDR considered switching to taxation of gross income. It probably would be unconstitutional, but that was sort of on the table. His Treasury Secretary, Henry Morgenthau, proposed capping corporate profits at 6 percent — meaning taxing away everything above 6 percent. That didn’t go through and capping ordinary income didn’t go through, but these were the things that were being considered at the time.

This entry is cross-posted on the Rundown- NewsHour’s blog of news and insight. Follow Paul on Twitter.