Thursday, January 21, 2010


Megan McArdle's Great Leap Forward Has a Snag

I really wasn't even going to comment on Megan McArdle's surprisingly specific recommendation for health reform (HT2MR):
Raise the Medicare tax by half a percentage point, and eliminate the tax-deductibiity of health insurance benefits for people making more than $150K a year in household income, $100K for singles. Then make the federal government the insurer of last resort. Any medical expenses more than 15% or 20% of household income, get picked up by Uncle Sam.
But then when I read "Megan McArdle Advocates 376,537.65% Marginal Tax Rate" by David R. Henderson, I had to pass it along. Here's David:
So now imagine that you're a married person with a family and you're making exactly $150K a year. Your employer pays $10K toward your health insurance. Of course, it's not subject to federal income tax, state income tax, or Social Security or HI tax. You and your spouse make a total of $150K, split roughly evenly, so both of you pay the marginal payroll tax rate of 7.65%. You also pay a marginal income tax rate of 25% and a state income tax rate of 5%. So your total marginal tax rate is 25 + 5 + 7.65 = 37.65%.

Now you earn one more dollar. What happens? That whole $10K employer contribution becomes taxable and so you pay tax on it at 37.65% or $3,765. You made an extra buck and you paid $3,765 extra in taxes. Oh, yes, plus $0.3765. So you paid $3,765.3765 in taxes. Your marginal tax rate on that dollar: 376,537.65%.
Is David right? I think so, but I went to the gym today--this figure's not natural, kids--and I am too tired to be sure. I will apologize to Ms. McArdle if tomorrow morning some of you have explained in the comments that David is wrong.

I think that's literally what she wrote but I'm sure she meant to phase it in such that the marginal tax rate never goes above 100%; writing out all the gory details, even for a simple proposal, would make the blog post as interesting as...well, health care reform legislation. However, I'm curious how she decided on $150k for families -- would it perhaps be because that puts her safely below the threshold?
$150K for families has the nice effect of providing an incentive for families to break up into two households so that the cap becomes $200K.
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