A worker lives in a state that has its own income tax. The worker is in the 31 percent federal tax bracket. In addition, he is subject to a 9 percent MTR for his state income tax. Assume that mortgage interest is deductible both on his federal and state income tax, and that state income taxes are deductible on the federal income tax; also assume that he itemizes deductions.
Calculate the effective MTR the taxpayer is subject to after considering the tax deductibility of state income tax payments on the federal return. Show how the state income tax affects the excess burden of the mortgage interest deduction for the worker. Assuming that the worker also pays a 7.65 percent Social Security tax on his labor earnings, calculate the MTR for his labor earnings.