Taxing Adjusted Gross Income Instead of Taxable Income

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Reprinted with permission of Tax Analysts.

The complete article with the table is available in PDF format.

Abstract

The House leadership has proposed to finance health care reform with a surtax on adjusted gross income (AGI) of high-income individuals, while the president's budget would increase the two top marginal tax rates on taxable income. Income taxed at statutory marginal rates is 58 percent of AGI for all taxpayers but only 46 percent of AGI for taxpayers with income over $1 million. While personal exemptions and deductions account for most of the difference between the two tax bases for the population as a whole, capital gains and qualified dividends make up most of the difference for very high income taxpayers.

Introduction

The House leadership recently proposed a new surtax on high income individuals to help pay for healthcare reform. The surtax rates on couples would be 1 percent on modified adjusted gross income1 between $350,000 and $500,000, 1.5 percent on AGI between $500,000 and $1 million, and 5.4 percent on AGI in excess of $1 million (singles would face the same rates with brackets 80 percent as high). The president's budget also raises rates for the top two income tax brackets from 33 and 35 percent to 36 and 39.6 percent.

(End of text. The complete article with the table is available in PDF format.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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