The Top Income Tax Rate

The Top Income Tax Rate

Dear Garden State Trust:

I see that President Biden has proposed bringing back the 39.6% income tax rate early, before its already scheduled return in 2026. Why is that tax rate a fraction, instead of a whole percentage rate as all the other tax rates are? Where did that extra 0.6% come from? Wouldn’t it be simpler to just round up to a 40% top tax rate?

—Trivia Buff

Dear Trivia:

It’s a political story. When he ran for President in 1992, Bill Clinton campaigned for a 10% “millionaire’s surtax” to be applied to everyone with taxable income over $1 million. The top tax rate was then 36%, and 10% of that is 3.6%. Add them up and you get the 39.6% top tax rate.

When the millionaire’s surtax was enacted, there was a new definition of “millionaire,” as the new top rate applied to anyone with taxable income over $250,000. This rather stark departure from the campaign rhetoric was justified at the time with the observation that those with incomes over $250,000 likely had more than $1 million in assets, so they were still millionaires. However, the fact that so many more taxpayers ended up affected by the increase has led to some skepticism of political statements on taxes ever since.

Although a round 40% top tax rate might look simpler, the computers that handle all the tax calculations these days are not bothered by extra digits in the tax rate.

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(May 2021)
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