Once upon a time, we came up with a empirical relationship between the size of the national debt, the nation's gross domestic product and the nation's population that seems to have some explanatory power for how high the maximum income tax rate in the U.S. is set.
The last time we did that math, just five days into the then brand-new Trump administration, we found that U.S. politicians would be most likely to set the top federal marginal income tax rate at 45%, but could be able to cut the nation's top federal income tax rate if "the burden of the national debt declines, which would take significant cuts in planned spending growth, robust growth in the U.S. economy, and also an increase in the size of the population (ideally of working-age individuals), each of which would reduce the nation's debt burden per capita".
Now that we're past the first month of the next fiscal year, we can redo the math with the best estimates and projections that we have for 2017, where of those three things, only the strength of the U.S. economy has relatively improved with respect to its trend during the Obama admininstration. Given the size of the national debt, the nation's GDP and the population, our tool now predicts that modern U.S. politicians would set the maximum income tax rate in the U.S. to be about 44%. (If you're accessing this article on a site that republishes our RSS news feed, you may want to click here to access a working version of this tool on our site).
|U.S. Economic Data|
|National Debt [trillions USD]|
|Nominal GDP [trillions USD]|
|Where Might the Politicians Set the Top Tax Rate?|
|Debt Burden per Capita (or Debt-to-Income-to-Population Index Value)|
|Where Old School Politicians Would Set the Top Tax Rate|
|Where Today's Politicians Would Set the Top Tax Rate|
In reality, the maximum federal income tax rate that applies in the United States today is currently 43.8%. This is the income tax rate that self-employed Americans pay if their adjusted gross income exceeds $415,050 for single income tax filers, or $466,950 for married income tax filers.
The way to get to that figure is to add up the following maximum tax rates:
- 39.6% regular income tax rate
- 2.9% Medicare payroll income tax, which goes to sustainMedicare's trust funds (if you have an employer, they pay half this tax, where you pay the other half through your paycheck).
- 0.9% Additional Medicare Tax, which was passed as part of Obamacare, but doesn't go to sustain Medicare's trust fund (instead, it feeds straight into the U.S. Treasury's general fund, where it can be spent on anything the government wants).
In 2017, the payroll tax for Social Security isn't imposed on income earned through wages or salaries above $127,200, so its tax rate of 12.4% for the self-employed (or 6.2% each for employer and employee) doesn't add to their maximum income tax rate for higher incomes. The highest income earners don't get a break however, because the U.S. government more than makes up the difference by imposing higher regular income tax rates on these income earners that kick in at levels above Social Security's cap.
The following chart illustrates the political equilibrium that U.S. politicians have generally followed since the income tax was enabled to go into effect by the 16th Amendment to the U.S. Constitution in 1913.
The key thresholds to which to pay attention are the blue-dashed upper limit, which represents the U.S. government gouging American taxpayers so badly that they were forced to back off imposing such high tax rates, and the red-dashed lower limit, which generally represents the equilibrium level at which modern politicians have set the maximum income tax rate over the last 30 years. Too far above the lower limit, recent politicians have acted to cut income tax rates. Too far below the lower limit, politicians have sought to impose higher income taxes to compensate for their having increased the national debt too much to be absorbed by the growth of the economy and the population.
For President Trump, who has indicated a desire to cut tax rates, this tool suggest that it isn't going to happen without a decline in the personal burden of the national debt, which would take significant cuts in planned spending growth, robust growth in the U.S. economy, and also an increase in the size of the population (ideally of working-age individuals), each of which would reduce the nation's debt burden per capita.
Without those things, we believe that U.S. politicians will have little appetite to go along with a cut to the nation's maximum personal income tax rate, which is perhaps why the tax reform bill that has been put forward in the U.S. Congress actually proposes to keep the top statutory tax rate for individual income exactly the same.
Worse, because a coalition of politicians would like to spend more money, they've built a stealth tax hike into the proposed tax "cut" bill to boost the statutory top marginal personal income tax rate to 45.6%, which rises to 49.4% when we include the federal income taxes for Medicare and Obamacare.
Nor does that include the additional burden of state or local government income taxes, which in the case of a high tax state like California, boosts the combined top marginal personal income tax rate in the U.S. as high as 62.7%. [Note: when comparing U.S. income tax rates with those of other nations, combining state and local income tax rates will produce the most apples-to-applesresult.]
Having an excessive burden of national debt however ensures that outcome. If U.S. politicians want to change that result and cut personal income tax rates, their best path forward lies in restraining the growth of the government spending that is the primary contributor to the growth of the national debt.