Loophole in Obama Tax the Rich Plan Would Spare Many Sort-Of Rich

Sunday, December 09, 2012
(graphic: Affordable Housing Institute)

Although President Obama says he wants to raise tax rates on the rich to pay down the deficit and reduce inequality, his plan would actually raise marginal tax rates on barely 1% of taxpayers, according to the Tax Policy Center, a widely respected think tank. In fact, most families making up to $300,000—and many of the “near-rich” with even larger incomes—would not pay higher marginal tax rates.


Blame the complexity of the tax code and the President’s fidelity to a five-year-old campaign promise.


Despite occasional efforts to tame the IRS tax code and regulations, which fill 16,845 pages, the incredible complexity of tax law makes it difficult to predict exactly how a given change will affect taxpayers at different income levels. In 2007, however, Obama made a promise that he reiterated many times on the campaign trail, including in September 2008: “I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”


In order to keep that promise, the administration proposed in 2009 to raise marginal rates on taxable income above $230,000, as families are entitled to shelter a minimum of $20,000 from taxation. However, since such families typically shelter about $60,000—meaning they earned about $290,000—the Obama proposal would keep taxes down for most families earning that amount.


“They wanted to be able to say that ‘Absolutely nobody making less than $250,000 could possibly pay higher taxes under our plan,’” Robert S. McIntyre, director of Citizens for Tax Justice, told The New York Times. “So they had to assume the most ridiculous assumptions, that even if you’re a childless couple with no itemized deductions making $250,001, your taxes still won’t go up. They figured that if this couple existed and their taxes went up, somebody would find them and jump on ’em.”


Unless the White House and Congress reach an agreement by December 31, federal taxes will go up next year for a majority of Americans with the scheduled expiration of the tax cuts passed under Presidents George W. Bush and Obama. Although the President has proposed, and the Senate has passed, legislation to prevent most of the scheduled increase for those making less than $250,000, House Republicans have refused to pass it unless the rich are protected as well. So far, stalemate has ensued.


Despite the President’s focus on $250,000, the dividing line appears to be at $300,000. The expiration of other Bush tax cut provisions, including limits on deductions and higher taxes on investment income, will raise taxes for only 32% of families with income between $250,000 and $300,000, according to Citizens for Tax Justice, while 77% percent with income between $300,000 and $350,000 would see an increase.


In any event, most affluent households will pay higher taxes next year, because a two-year-old payroll tax break is scheduled to lapse on Dec. 31 and the Affordable Care Act levies new taxes on married couples earning more than $250,000 and singles earning more than $200,000 in adjusted gross income.

-Matt Bewig


To Learn More:

In Obama’s Plan to Tax Rich, $250,000 Figure May Mislead (by Catherine Rampell and Binyamin Appelbaum, New York Times)

Would Taxing the Rich Really Hurt Economic Growth? (by David Wallechinsky and Noel Brinkerhoff, AllGov)

House GOP Blocks Nonpartisan Report that Debunks Tax Cut Mythology (by Matt Bewig, AllGov)


chuto 11 years ago
Also inexplicable is why Mr. Obama insists on 200K for singles and 250K for couples. Why the marriage penalty again? Why not 125K and 250K...or 200K and 400K?

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