Biden’s Payroll Tax Doughnut Hole Isn’t So Sweet

(James Hamill, Albuquerque Journal) Joe Biden has released a few more details about his tax plan.

One should never take a candidate’s tax plan to mean an actual plan. It’s a bit more than a party platform but definitely less certain to be pursued than a dinner reservation. But’s let’s consider it anyway.

Biden says taxes will go up for high-income people. This will happen. If you doubt that, look at the budget deficit. Let’s now pause for howling….

Biden says the trigger point for higher taxes will be $400,000. We can assume this is taxable income, which might equate to something more like $450,000 to $500,000 of gross income sources.

Second, Biden proposes to reinstate the “Pease” limitation. This reduces itemized deductions as income exceeds a threshold. So as income rises deductions are lost and the effective rate goes above the statutory rate.

Third, Biden proposes a doughnut hole for payroll taxes. This is a doughnut hole designed to fatten up the federal coffers.

Payroll taxes have two components – OASDI and Medicare. The OADSI share is 6.2% for both the employee and the employer and, in 2020, is capped at $137,700 of wages.

Self-employed people pay 12.4% of their earnings for OASDI, but again capped at $137,700. The doughnut would mean that no tax is paid from the current cap (which is inflation adjusted) up to $400,000. But at $400,000, it’s back!

So forget about nibbling around the edges with an income tax rate increase, perhaps from 37% to 42% (my made-up number). Tack 6.2% or 12.4% on top of that and a bit of wailing might be in order.

[Read more…]