Did you know Minnesota is considering a 12.65% state income tax rate? Or that some Minnesotans would face marginal income tax rates over sixty percent?
Let’s look at the numbers of how layers of taxes add up to effective marginal income tax rates over 60%:
Federal income tax rate 39.6% (top tax bracket)
Federal FICA 15.3% (combined FICA tax rate up to $113,700 of each individual’s earnings)
Minnesota income tax 12.65% (Revenue Estimate of a 9.85% tax rate + 2.8% surtax for the 2013 and 2014 tax years)
The combined effective marginal tax rate on secondary earners would almost never be equal to the simple sum of 39.6% + 15.3% + 12.65% = 67.55%.
This is because these hard-working taxpayers would better of deducting their Minnesota state income tax as itemizers on their federal taxes and because some of the FICA contributions may also be tax deductible. However, even considering federal deductibility, the effective marginal tax rate would still be over 60%.
The type of taxpayer who would face effective marginal tax rates over 60% would be the secondary earner, filing jointly with their spouse who earned sufficient income to put the couple in the top federal tax rate, but as an individual makes under the FICA limit of $113,700. For example a teacher, nurse, or home day-care provider filing jointly with a surgeon or successful owner of a business could have individual income below the $113,70 FICA limit, but enough joint income to be in the highest federal and Minnesota tax brackets.
Of course, the combination of several layers of taxes and phase-outs of government subsidies also produces extremely high effective marginal tax rates that can approach and exceed 100%!
Finally, Professor Steven Landsburg at the University of Rochester reminds us that “You Too Could Face 95% Taxation” from multiple layers of taxation on working now to spend when you are older. (Source: Steven E. Landsburg, ‘‘You Too Could Face 95% Taxation,’’ The Wall Street Journal, March 15, 2011, p. A 22.)