As a practical matter, the debate over higher taxes is finished. If there’s an agreement to avoid the “fiscal cliff,” it will almost certainly contain large tax increases mostly or entirely on the wealthy. President Obama defines them as couples with more than $250,000 of income and singles with $200,000 or more. The open questions are which taxes would go up, by how much and with what effect.
Let’s try to make sense of the numbers.
The president wants $1.6 trillion in higher taxes over the next decade. To provide perspective: In the unsuccessful 2011 budget negotiations, House Speaker John Boehner reportedly supported a deal with $800 billion of tax increases. So the president — flush with victory for a second term — has doubled his demand over Boehner’s previous best offer. This could be a huge obstacle to agreement.
But Obama can claim that this has been his position all along. The White House included the $1.6 trillion figure in its 2013 budget submission, though the figure didn’t receive much attention. According to Donald Marron, head of the nonpartisan Tax Policy Center (TPC), the administration would raise the $1.6 trillion as follows:
● The top individual tax rates would rise from their present 33 percent and 35 percent to 36 percent and 39.6 percent for those over Obama’s income thresholds. The 10-year revenue gain: $442 billion.
● Tax deductions would be trimmed. They would be phased out for the very rich and would provide no more than a 28 percent write-off for others in high tax brackets. Revenue gain: $707 billion.
● Tax rates on dividends from stocks would rise from today’s 15 percent to the rates on wages (up to 39.6 percent). Revenue gain: $206 billion. (Ownership of stocks is heavily concentrated among richer Americans.)
● Rates on capital gains — profits from sales of assets such as stocks — would rise from 15 percent to 20 percent. Revenue gain: $36 billion.
● The personal exemption for the wealthiest taxpayers would be phased out. Revenue gain: $42 billion.
●The estate tax would be restored to its 2009 level. At present, there’s an exemption from taxes for estates up to $5.1 million, and the tax rate on the remainder is 35 percent. In 2009, the exemption was only $3.5 million, and the tax rate was 45 percent. Revenue gain: $119 billion.
As intended, the rich bear the burden of these increases.
The top 1 percent, with incomes beginning at $597,000, would pay an average $72,000 in higher taxes, representing a 5.1 percent decline in their after-tax income, the TPC has estimated. The wealthiest 0.1 percent (included in the top 1 percent), with a minimum income of $2.9 million, would pay an extra $403,000, a 6.6 percent drop in their after-tax income, says the TPC. The richest 95th to 99th percent of taxpayers (income threshold: $252,000) would pay an average of $5,765 more.
Though significant, these increases would roughly restore the tax burden on the rich to where it was before the Bush tax cuts in 2001 and 2003, other TPC estimates suggest. The top rate was then 39.6 percent, the rate on capital gains was 20 percent and the estate tax was higher than now. Possibly altering this conclusion are tax increases on the wealthy — the same income definitions — passed as part of Obamacare. The tax on wage and salary earnings was raised 0.9 percentage points; on capital gains and dividends, it was increased 3.8 percentage points.
“With state income taxes, top marginal rates will now be approaching 50,” says Marron. “This creates an incentive for the wealthy to spend more time with their lawyers and accountants to change how they structure their activities [to minimize taxes].”
To reduce this, many economists favor limiting tax breaks to keep rates low. Republicans have been more open to this approach, because (they argue) lower rates might mitigate the adverse effects of higher tax burdens on the economy. Individuals would still have incentives to work hard; they’d keep a higher percentage of any increase in earnings. Similarly, small businesses — which often pay taxes at personal income rates — would have incentives to hire.
The TPC estimated that limiting taxpayers’ itemized deductions — including mortgage interest payments, charitable contributions, and state and local taxes — to $17,000 could raise $1.7 trillion over a decade. Marron points out, however, that some resulting tax increases would fall on those below Obama’s $200,000/$250,000 threshold.
There’s plenty left for negotiation.