The debate concerning the top tax rate for wealthier Americans is so difficult in part because most people only pretend to know the actual figure.
Sure, we all know Republicans want to keep the top rate at its current level while Democrats prefer to let the George W. Bush-era rate cuts expire. And some of us may even know that the tax code’s current 35 percent figure would rise to 39.6 percent if President Barack Obama gets his way.
Beyond that, we get hazy. And no wonder: other sections of the tax code combine with the statutory rate in mysterious ways, creating a different effective top marginal rate. These include, for example, phaseouts known as Pease and PEP, under which itemized deductions and personal exemptions fade. If you really want to capture the top taxpayer’s situation, you have to add state taxes into the mix. So what’s the exact top rate? Nobody knows. Or, maybe, nobody wants to know.
I asked the biggest, baddest tax mind I know, former Congressional Budget Office director Douglas Holtz-Eakin, to tell what he thinks the top tax is. Even Holtz-Eakin approximated, texting back a formula that might serve as the theme song for tax year 2011: “39.6 + 2 (phaseout of pep and pease) + 3.8 (Medicare net investment income tax) = 45.4. Add in state-level taxes and 50 is easy to reach.”
Holtz-Eakin is a genius. If he’s approximating, it’s because he can’t bear to feel the pain of the precise reality.