Some quick talking points on the Reid surtax, up for consideration this week in the Senate:

  • Facing a revolt from within his own party over the tax hikes contained in President Obama’s “Stimulus 2.0” plan, Harry Reid has come up with an alternative tax increase that may actually do more economic damage and kill even more jobs.
  • Beginning in 2013, a new 5.6 percent “surtax” would apply to modified adjusted gross income which exceeds $1 million ($500,000 in the case of married filing separately returns).  After 2013, this figure would be adjusted for inflation
  • Because the top marginal tax rate is scheduled to rise from 35% today to 39.6% in 2013, the Reid surtax would create a new top marginal tax rate of 45.2%–the highest level since before the 1986 Tax Reform Act.
  • Since this surtax affects adjusted gross income, not taxable income, this is also a backdoor claw-back of every itemized deduction taken by taxpayers—including mortgage interest, property taxes, state and local taxes, and charitable contributions.  Interestingly, the deduction for speculative “margin loan” investment interest is held harmless.
  • The Reid surtax is a permanent income tax hike which would be used for temporary tax relief and permanent new spending programs.
  • In addition, the Obamacare law raises the top Medicare payroll tax rate from 2.9% to 3.8%.  When combined with the scheduled hike in the current top rate and the Reid surtax, this would create a new tax rate on small employer profits of approximately 49 percent.  When state income taxes are taken into account, the top income tax rate on small employers will easily exceed 50 percent under the Reid surtax.
  • The Treasury Department reports that 80% of the taxpayers affected by the Reid surtax are small business owners.  Since small business owners pay business taxes on their 1040 tax forms, to raise the tax rate on these owners is to raise the tax rate on the very small businesses that create jobs.  The Reid surtax will kill jobs.
  • Also according to the Treasury Department, 41 percent of all business income reported on personal tax returns will face a rate hike under the Reid surtax.  This is the income which small employers need to create and sustain jobs.
  • The tax code is already highly-progressive for those making more than $1 million.  Despite earning 10% of all income, these taxpayers pay 20% of all income tax.  They have an effective average tax rate of 25%, far higher than median income taxpayers, even when FICA is inappropriately added in.

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What do you think?  Will the Reid surtax kill jobs?