Maximum possible US tax responsibility

Factual Questions
1

I am curious what the maximum combined US federal/state tax burden would be for a very wealthy person who chose not to take any unusual loopholes that aren’t available to a wage-earning family with simple finances.

Given that the top income tax bracket is 37%, and this also applies to capital gains, I don’t see how it could ever exceed 37%. And given that this top bracket is of course marginal, I don’t see how most people could even get close to 37% unless their annual income is far in excess of a million dollars. Maybe there are state taxes that soak the rich, but a lot of people move to states with a smaller tax burden.

I ask this because yesterday, a famous and reliably stupid person on Twitter claimed that she routinely pays 50% of her income in US taxes. This seems mathematically impossible to me (again, we’re talking US, not some other country).

2

Do you know if that’s federal only? We can work it out either way I suppose, if you don’t know. You mentioned state in the OP but I want to be sure that’s what’s included here.

3

Per random googling, CA has a top marginal rate of 13.3%
Note that some sub-state jurisdictions will tax income. E.g. counties in MD. NYC.

4

US Taxes can also include state taxes. New York tax rate is 12.28% so this would put a overall top marginal tax rate right at 50% but your right a person’s effective tax rate would not be that high. There are also city income taxes.

Denver occupational privilege tax is also known as OPT or head tax. The occupational privilege tax consists of two distinct parts: the employee occupational privilege tax and the business occupational privilege tax. The tax is imposed on businesses operating in the City and on individuals who perform sufficient services within Denver to receive as compensation from an employer at least five hundred dollars ($500) for a calendar month. Each taxable employee is liable for the employee OPT, which is withheld by the employer at a rate of $5.75 per month.

The person may also include sales tax which adds a few percentage points.

5

Assuming she’s self-employed, we can also add in 12.4% for social security taxes, and another 2.9% for medicare. That’s a 51.3% marginal rate. Not including state and municipal taxes.

6

There’s also payroll taxes and sales taxes, but if she’s the type of person who subscribes to Romney’s “half of Americans don’t pay any taxes!” line of thinking then those shouldn’t count.

7

If we’re going that route, throw in property taxes. Do we know where this famous person lives?

Although if we’re assuming ludicrous income, the effective rate for SS approaches zero.

8

Hey now, nobody said anything about internal consistency here!

9

The quote was that she has " paid nearly 50 % of [her] income in *taxes , year after year".

Even with state tax added, I just don’t see it. Mathematically, given that the top 37% tax bracket is marginal, it is impossibly to actually reach 37% effective rate just on federal income

Most state taxes are a pittance compared to that. If someone did owe a big state tax burden, it’s all deductible on federal, so it washes out.

I mean, maybe she has a habit of buying items with an exorbitant VAT. I could believe that she drinks massive amounts of wine and buys lots of firearms, but that seems like an awful lot of booze and guns for one person.

I don’t see how anybody could have enough money to pay that much tax, yet not afford a decent tax attorney to set up some avoidance mechanisms like offshore accounts, shell corporations, art investments, stuff like that.

10

As I understand she has property in New York and Florida. It would make no sense to keep a property in Florida (zero income tax) but choose to pay New York rates (no idea what they are, but it’s not zero).

11

It wouldn’t make sense if you have a choice, but my understanding (not that I’ve lived there) is that NY is quite motivated to determine that you live there when it comes to taxes.

12

Wasn’t the deductibility of state and local taxes greatly reduced by tax reform in the past few years?

13

Even if it wasn’t, it doesn’t “wash out.” It’s a deduction, not a credit.

14

Good point. SS taxes max out at $17,074.80. At the lowest amount to reach the top tax bracket for a single earner ($510,301), SS taxes are just 3.35% of that, and go down as income increases.

15

Was she COMPLAINING about paying so much? Because my ignorant perception is that it would almost require an intentional effort for a wealthy person to style their income in a manner such that their liability was that great.

16

A possible explanation might be that the “income” she was paying 50% of was only active income - salary, etc. So she was not counting capital gains, etc, as “income”, but was counting the taxes she paid on it.

17

If you include property tax, the total taxes paid can easily be over 100%, let alone 50. I heard from a real estate agent about another client of his who retired early and sank most of his savings into timber land. Most years he had no income at all, not even Social Security, but he still had to pay property tax on his timber holdings. Luckily he had the cash savings to pay the bill. The plan was to harvest timber once every fifteen years, so the tax-to-income ratio would be reasonable if averaged over that time period, even if it seems (at first blush) unreasonable for most years.

Let’s run some numbers in the OP’s secenario. These numbers are not very realistic, but can give us a general idea of how such high rates can come to be. Suppose Tammy Taxpayer earns $1 million of salary and nothing in investment or business income, lives in New York in a $3 million home and also has a $1 million home in Miami, Florida, both owned outright with no mortgage. Suppose she has no dependents, and no itemized deductions other than state and local taxes. If she spends more than 184 days of the year in New York (which she might have to for work), she is a resident of NY for tax purposes, and doesn’t have the option of being a Florida resident for tax purposes. Suppose that she spends one-quarter of her income on items subject to sales taxes, two-thirds of those purchases in NYC and one-third in Miami. I won’t include payroll taxes, because those work something like insurance; she’s essentially paying premiums now but may receive equal benefits later. She will pay approximately

$38,000 in New York City local property tax
$21,000 in New York City school tax
$15,000 in New York sales tax (state-city combined)
$21,000 in combined property taxes in Miami
$6,000 in Florida sales tax (state-local combined)

Now I don’t really know what’s deductible for NY city and state income tax purposes but suppose that all of the local taxes above are deductible except the Florida property tax. New York, like most states, does not allow deduction of federal taxes paid. Her taxable income for NY purposes is 920000. Then she will pay about:

$36,000 in NYC income tax
$62,000 in New York state income tax
$0 in Florida income tax

Currently for federal tax purposes, state and local tax deductions are limited to $10,000, and since she has no other deductions, she’s better off taking the standard deduction of $12,200. This makes her taxable income for federal purposes 987,800. So she will pay about

$329,000 in Federal income tax

Total local, state, and federal taxes paid is $528,000 on a total income of $1 million, or 52.8 percent. That is a total tax rate, not marginal.

18

The OP mentioned “US taxes” which would exclude state and local taxes as well as sales taxes, etc. The claim is fatuous.

19

Oh FFS:

It’s literally right there in the first sentence, and the OP responded when asked for clarification.

20

OK, I can see if you have enormous property taxes, then that can add up to a sizeable fraction of income.

However, as we all know, property tax is not a function of income. It’s a function of wealth, and possibly hereditary wealth.

I find it an egregious case of bait and switch to point at a big honking tract of expensive property and express it as a function of income tax. If property tax counts, then anyone with a very small income and a very large property could claim that they suffer an oppressive 10000% tax rate (as percentage of income).

If you have an expensive property and the property tax is destroying you, then you’re not a very smart property owner.