The eye-popping potential top marginal tax rates on taxpayers under Joe Biden’s tax plan in states like New York recently made national headlines.
Indeed, an analysis by the Tax Foundation showed that the combined effective marginal tax burden on top earners would exceed a whopping 60% in New York, New Jersey, California and Hawaii.
What is critical to note is that a substantial share of small businesses also pay taxes via the personal income tax code, so such tax rates would crush many small businesses.
So what would a Biden tax plan look like for North Carolina small businesses?
A top combined state & federal marginal effective tax rate of 57.8%
Bear in mind, these are top marginal rates, which means the rates are effective on dollars earned above a certain threshold, not on the entirety of income.
Nevertheless, the rates would create a great disincentive against small businesses expanding and creating jobs, while incentivizing the movement of income to shelter it from such exorbitant tax rates.
Moreover, it won’t just be high earners impacted by these high marginal rates. To trace out the true impact of taxes, what economists refer to the tax incidence, we must realize that changes to the tax code will change the behavior by those legally compelled to pay the tax.
To discover the true tax incidence, we must consider who will be impacted by these changes in behavior.
For instance, if small businesses decide not to expand because the burden on the marginal revenue they would generate is too severe, that means fewer jobs created – which harms those on the margins of employment.
Taxing the rich doesn’t just harm the rich, it hurts the economy’s most vulnerable.