by Anna Turner
The chart below tracks the marginal tax rate on an ordinary income of $500,000 for joint filers. Over time, these marginal tax rates have fallen to nearly half the level typical in the 1950s through the 1970s. Since 1980, there has also been a huge income redistribution from the bottom 90% of earners to the upper 5%, and particularly to the upper 1%. House Speaker Nancy Pelosi is right in proposing a surtax on the nation’s top earners to help fund health care reform. Pelosi says that in the final bill a 1% surtax will kick in for annual income levels of $500,000 and increase to as high as 5.4% for earners making $1 million or more. Even so, the proposed surtax would still leave the marginal tax rates on high earners at a lower level than it has been for most of the past 60 years.
Perhaps more important, however, is that the House-proposed surtax would apply to adjusted gross income, which includes both ordinary income (examined in the above chart) as well as capital gains and dividends that are currently taxed at a preferential rate no higher than 15%. Research from the Tax Policy Center suggests that capital gains and dividends often comprise a large portion of these top earners’ overall income, meaning that these top earners are already enjoying a tax rate on all their combined sources of income that is significantly lower than the tax on income shown in the chart. In the end, the House’s proposed surtax would provide a valuable source of revenue to help fund a new health care program.