Earlier today I wrote that President Obama’s proposed tax hikes would move upper-income taxpayers a lot higher than the 39.6 percent they paid under Bill Clinton because of the new 3.8 percent Medicare tax, to a total of 43.4 percent. There is actually an argument that it is higher.
“PEP” refers to Personal Exemption Phase-out. “Pease” refers to the late Rep. Don Pease (D-Ohio), who pushed through the legislation limiting itemized deductions. President Bush eliminated them but Obama’s budget plan would reinstate them.
[Rep. Paul] Ryan calculated that reinstating “PEP and Pease” would add about two percentage points to a wealthy person’s effective marginal tax rate. We thought his estimates appeared in the ballpark.
But some smart readers noted that eventually these very complicated tax provisions are fully phased out and thus no longer affect a taxpayer’s marginal rate. They are right and we should have made that clear.
In particular, the PEP provision actually is fully phased out just as a taxpayer begins to reach the 39.6 percent tax rate. So PEP really hits people in 36 percent tax bracket, not the 39.6 percent tax bracket. . . .
We should have noted that these provisions eventually phase out for the very rich and no longer impact their marginal rate. But there is still an impact at the 39.6 percent rate that roughly mirrors Ryan’s calculation, and thus our judgment on his statistic remains unchanged.
If your eyes have glazed over, don’t worry. The most accurate way to put it is this: Obama wants to raise upper-income taxpayers at least to a 43.4 percent rate, but you could argue that the number is closer to 45 percent for some taxpayers.
What it is not is returning to the “Clinton rate.” If Obama doesn’t understand it, his staff should explain it to him. And if I were Bill Clinton, I’d be kinda peeved that Obama is misrepresenting the tax rates in the 1990s.