Wednesday, January 2, 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].