Biden's tax plan would push top individual income rate to highest among developed countries

The U.S. would have the highest personal income tax rate in the developed world under a White House proposal that would overhaul the nation's tax code in order to fund President Biden's signature spending plan.

The framework that Biden unveiled costs roughly $1.75 trillion ($1,750,000,000,000), which includes funding for universal pre-kindergarten, a one-year expansion of the child tax credit, a modified Medicaid expansion and clean energy tax credits, among other things. It relies on a 15% corporate minimum tax, surtaxes on the top sliver of U.S. households, stricter tax enforcement, taxes on corporate stock buybacks and higher taxes on U.S. companies' foreign earnings. 

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But the Biden team's proposal, which comes after months of negotiations among Democrats, would push the average top tax rate on personal income to 57.4%, the highest rate in the 38-member Organisation for Economic Co-operation and Development, according to a new analysis published by the non-partisan Tax Foundation.

The top sliver of U.S. households would face a 5% surcharge on modified adjusted gross income (MAGI) above $10 million, plus a 3% charge on MAGI above $25 million, for a total increase of 8% – which is equivalent to about a 9.1% tax rate on taxable income, the analysis shows. 

The Build Back Better plan would also close provisions in the tax code that allow some wealthy taxpayers to avoid paying the 3.8% Medicare surtax on their earnings by strengthening a net investment income tax for anyone earning more than $400,000. 

Under current law, the top marginal tax rate on ordinary income is scheduled to increase from 37% to 39.6% in 2026 when parts of Republicans' 2017 tax law expire. That means the top marginal tax rate on personal income at the federal level would rise as high as 51.4% in 2026, or roughly 52.5% on the basis of taxable income.

"As policymakers explore options to raise revenue, they should keep in mind how the U.S. compares to other countries and what the economic effects might be," the analysis said. "Raising the top marginal tax rate on ordinary income to the highest in the OECD will damage U.S. competitiveness. It will also reduce incentives to work, save, invest, and innovate, with broad implications for the U.S. economy."

That rate doesn't even factor in state income tax, which is paid by most Americans (just eight states do not tax income). The average top marginal state-local tax rate is about 6%, according to the Tax Foundation, which would mean the combined top tax rate on personal income would be around 57.4%. That's higher than any rate currently levied in a developed nation.

Wealthy taxpayers in New York and California would pay the highest tax rates of 66.2% and 64.7% respectively, while six other states would have top rates above 60%.

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"Even in states that forgo an income tax, such as Florida, taxpayers would have a top rate of 51.4 percent, which far exceeds the top rates found in most OECD countries," the Tax Foundation said.  

Japan and Demark are currently tied among OECD nations for the highest top income tax, with a rate of 55.9%. They're followed by France (55.4%), Austria (55%) and Greece (54%). 

The U.S. currently has a top combined rate of 42.9%.