Under the House Build Back Better Act, the average top tax rate on personal income would reach 52.3 percent, tying Sweden as the 9th highest rate in the Organisation for Economic Co-operation and Development (OECD).
The House Build Back Better Act would raise the top federal marginal tax rate on ordinary income from 37 percent to 39.6 percent. High-income taxpayers would face an additional 3 percent surcharge on income in excess of $5 million. Finally, the plan would redefine the tax base to which the 3.8 percent net investment income tax (NIIT) applies to include the “active” part of pass-through income, such that all income above $400,000 (single filer) or $500,000 (joint filer) would be subject to tax of 3.8 percent due to the combination of NIIT and Medicare taxes. Overall, the top marginal tax rate on personal income at the federal level would rise to 46.4 percent.
In addition to the top federal rate, individuals face taxes on personal income in most U.S. states. Considering the average top marginal state-local tax rate of 5.9 percent brings the top tax rate on personal income to 52.3 percent.
Individuals in six U.S. states and the District of Columbia would face top marginal tax rates higher than the average top rate in any OECD country. Taxpayers in New York and California would have the highest rates, at 61.2 percent and 59.7 percent respectively, while those in New Jersey, Hawaii, the District of Columbia, Oregon, and Minnesota would all have top tax rates in excess of the current OECD high of 55.9 percent found in Denmark and Japan. Even in states that forgo an income tax, such as Florida, taxpayers would have a top rate of 46.4 percent, which exceeds the top rates found in more than half of all OECD countries.
But in contrast to other OECD countries, the U.S.’s top marginal individual income tax rate kicks in at a much higher income threshold, currently at around 9.2. times the average national income, and this is set to go higher under the proposal. In Denmark, the top rate of 55.9 percent kicks in at just 1.3 times the average income. If the U.S. adopted that approach, all income above $70,000 would be taxed at 55.9 percent, but instead it faces a 12 percent or 22 percent rate, depending on filing status. This reflects the fact that the U.S. under current law generally has a much more progressive income tax system than other OECD countries, and it would become more progressive under the House bill.
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. Raising the top marginal tax rate on ordinary income to one of the highest in the OECD will damage U.S. competitiveness. It will also reduce incentives to work, save, and invest, with broad implications for the U.S. economy. We estimate in the long run it would reduce the size of the economy by about 0.2 percent and eliminate more than 100,000 jobs.
Launch Resource Center: President Biden’s Tax Proposals