Bob Brinker on Obama Tax Plan Marginal Rate

Honeybee's summary of Bob Brinker's Sunday's Moneytalk show contains Brinker's comments on Senator Barack Obama's proposed tax plan.

"Brinker went on to explain how easy it would be (under the Obama tax plan) to construct this 60%+ marginal tax bracket for a lot of American entrepreneurs who create jobs."

It looks like Brinker was talking about the MARGINAL TAX RATE and I believe his numbers are correct.

Marginal tax rate is the effective tax you pay on additional income above the threshold, $250,000 in this case. You already deducted your home mortgage, etc. so that is not relevant in this discussion.

That is if you make $260,000, how much tax will you pay on that extra $10,000 under Obama vs McCain. He seems to have made an allowance for deducting state taxes since his number is less than adding up all the components.

Brinker showed how, in a high tax state like California or New York, the marginal rate for those making over $250,000 AGI will be about 62%.

Lets do a quick comparison (2008 tax rates)

Current Federal Taxes under Bush Tax Plan for single taxpayers who own their own business (pay both sides of Social Security tax) making $260,000:

Marginal Federal tax rate = 33%
Social Security Tax = 0% + 0% = 0%
Medicare Tax = 2.9%
Total = 35.9%

Proposed Taxes under proposed Obama Tax Plan for single taxpayers making $260,000 :

Marginal Federal tax rate = 39.6%
Social Security Tax = 6.2% + 6.2% = 12.4%
Medicare Tax = 2.9%
Total = 54.9%

Change in tax rate 54.9% - 35.9% = 19%

So under the Obama tax plan, small business owners who have to pay both sides of the Social Security tax will see their Federal tax rate on what they make in excess of $250,000 skyrocket (19%/35.9% x 100%) 53% in total tax dollars paid.

For California, he got the numbers close. The marginal tax rate in CA is 9.3%. Under current law, this is deductible on your federal return.

Current marginal Fed + CA Tax Rate:

35.9% + 9.3% x (1 - .33)
35.9% + 6.3%
Total = 42.1%

Marginal FED + CA Tax Rate under Obama:

54.9% + 9.3% x (1 - .396)
54.9% + 5.6%
Total = 60.5%

A 60.5% marginal rate in California means that a small business owner who makes $260,000 will pay $6,050 in taxes on that $10,000 above $250,000. Under the Bush tax plan, she now only pays $4,210.

If Brinker only has 20,000 subscribers to his newsletter (we have read he has as much as 200,000 subscribers) then his gross income is about $3.7 million! ($37 million income if he has the reported 200,000) It is not in his best interest to want higher taxes and I can't fault him for doing all he can to keep his rates low. His listeners only need to know he is not unbiased.

Obama supporters say those making over $250,000 should pay this extra $1,840 in tax for every $10,000 they make above $250,000 since they are doing so well under the current plan and can afford it. They also say McCain's plan will raise taxes on middle income workers by adding employer paid health care to taxable income. Let me know if there is a complete analysis with all the proposed changes to compare the two tax plans for all income groups.

Please leave comments about any tax rate changes, errors or omissions. Please note I am just a writer with a calculator, not a tax accountant so there could be some errors in my assumptions. Please feel free to point them out in the comments section.