Warning! by 401(K)2012
"I'm not proposing anything radical here," President Obama said on July 9. "I just believe that anybody making over $250,000 a year should go back to the income tax rates we were paying under Bill Clinton." Mitt Romney thinks otherwise: "This will be another kick in the gut to the middle class in America."
And so the fight is on again, just as in 2010. That was the year the Bush tax cuts of 2001 and 2003 were, by law, set to expire. Obama and the Democrats wanted to keep the Bush tax rates for most taxpayers while raising them only for couples with incomes over $250,000 and individuals over $200,000. Republicans wanted the tax cuts to be permanent even for the wealthiest. The two sides compromised by extending the cuts for everyone only until the end of 2012, kicking the can down the road to where we are now.
News media often talk about Obama's proposal as raising taxes on the upper 2%. But this number is an inaccurate shorthand for "the wealthy." According to an interactive map in the New York Times (1/14/12), $250,000 puts a couple in the top 3% nationally, but only in the top 5% in the New York City area.
From my informal survey I've learned that many people shared my difficulty in understanding the tax debate. So here's what I've been able to learn since then. I hope it's helpful.
The debate about income taxes concerns the MARGINAL rate on TAXABLE income. Taxable income is gross income minus deductions and exemptions.
For instance, if a couple with two dependent children files a joint return and takes the standard deduction and four personal exemptions, the first $27,100 of their income is tax free. Income above that amount is taxable and is divided into segments or "brackets" with increasing tax rates for higher brackets.
Here are the brackets for 2012 (resulting from the Bush tax cuts):
on taxable income from $0 to $17,400, plus
" 15% on taxable income over $17,400 to $70,700, plus
" 25% on taxable income over $70,700 to $142,700, plus
" 28% on taxable income over $142,700 to $217,450, plus
" 33% on taxable income over $217,450 to $388,350, plus
" 35% on taxable income over $388,350
So, for example, if your taxable income reaches $17,400, that gets you into the second bracket where you pay 15 cents on every further dollar you earn until your taxable income reaches $70,700. After that, you pay 25 cents, but only on every dollar beyond $70,700.
Unless Congress does something, the brackets for 2013 will revert to those of the Clinton era: the lowest rate will be 15%; the 25% rate will rise to 28%; the 28% rate to 31%; the 33% rate to 36%; and the 35% rate to 39.6%.
The President and the GOP are battling over how to treat couples with incomes over $250,000 and individuals over $200,000. Obama misrepresents his own proposal when he says that these filers "should go back to the income tax rates we were paying under Bill Clinton."
Instead of the Clinton rates, what Obama's actually proposing for these filers is that only the two top brackets revert to Clinton-era levels: the 33% rate will become 36%; and the 35% rate will become 39.6%, but ONLY FOR INCOME ABOVE THE $250,000/200,000 threshold. So even the wealthy would continue to benefit from the Bush tax cuts .
For example, if the married couple described above earns $251,000 in 2012, only $1000 of their income would be subject to a higher rate (36% instead of 33%). Their tax bill would increase by just $30. Actually, this couple would likely itemize deductions, letting them deduct much more than $27,100, and their tax bill would not go up at all.
According to Citizens for Tax Justice (CTJ), in 2013 "couples with adjusted gross income (AGI) between $250,000 and $300,000 would retain 98% of their Bush income tax cuts, on average, under Obama's proposal."
The CTJ report explains that couples earning $400,00 to $500,000 would, on average, keep 2/3 of their Bush tax cut ($7,029 out of $10,653). These poor souls are part of the 1% nationally. Of course, if you're a Wall Street CEO or hedge fund manager pulling in $10-20 million, Obama's plan will take away nearly all the average $700,000 tax cut Bush gave you.
So here's a question for Mitt Romney: where in all these numbers do we find the " kick in the gut to the middle class in America"? Perhaps he was thinking of the average income of his social circle.
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