The Impact of the Bipartisan Tax Fairness and Simplification Act of 2010 ("Wyden-Gregg") on Effective Marginal Tax Rates

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The Impact of the Bipartisan Tax Fairness and Simplification Act of 2010 ("Wyden-Gregg") on Effective Marginal Tax Rates

Katherine Lim, Jeff Rohaly

Published: July 14, 2010

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Abstract

The Wyden-Gregg tax reform proposal would represent a broad reform of the federal income tax system. This paper examines the plan's impact on individuals' effective marginal tax rates (EMTR), the incremental amount of tax owed on an additional dollar of income. We examine the impact on the EMTR for both wage income and realized capital gains against current law and current policy baselines. We find the Wyden-Gregg plan would lower the overall average EMTR on wages relative to both current law and current policy, but would raise the overall average EMTR on gains when compared with those same two baselines.

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Introduction

The Bipartisan Tax Fairness and Simplification Act of 2010 ("Wyden-Gregg," introduced as S. 3018) proposes a broad reform of the federal income tax system. This paper examines what the plan's impact would be on individuals' effective marginal tax rates, the incremental amount of tax owed on an additional dollar of income. We examine the impact of Wyden-Gregg on the effective marginal tax rate (EMTR) for both wage income and realized capital gains against current law and current policy baselines.

The Tax Policy Center (TPC) estimates that

Relative to a current policy baseline that makes the 2001 and 2003 tax cuts permanent, the Wyden-Gregg proposal would reduce the average effective marginal tax rate on wage and salary income for those earning less than $200,000 and raise it for high-income taxpayers; overall, the average EMTR would fall by 0.7 percentage points
Relative to a current law baseline in which the 2001 and 2003 tax cuts expire at the end of 2010, the proposal would reduce the average EMTR on wages and salaries for all income groups; overall, the average EMTR would fall by 4 percentage points
Wyden-Gregg would raise the average EMTR on realized long-term capital gains by more than 5 percentage points compared with current policy and by slightly less than 1 percentage point compared with current law

(End of excerpt. The full report is available in PDF format.)