OTP = Obama Tax Plan
Last week Forman & Goolsbee, Senator Obama’s key economic advisers “clarified” the candidate’s tax plan in a WSJ op-ed.
Obama web site:
www.barackobama.com/taxes
Article:
http://online.wsj.com/article_print/SB121867201724238901.html
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I may just be in the slow reading group, but Forman & Goolsbee’s “clarification” raised more questions than it provided answers.
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Consistent with their op-ed, the Barman web site says “The top two income tax brackets would return to 36% and 39.6%. All other tax brackets would remain as they are today. Obama would work with the Treasury Department to adjust the thresholds of these rates slightly to insure that no married couple making less than $250,000 (or single making less than $200,000) was affected by these changes.”
Currently, the 33% marginal tax bracket (which would go to 36% under Obama) starts at $200,300 for married couples filing jointly, $164,550 for individuals. So, the “slight” threshold adjustments will need to be about 25% to get them to $250,000 and $200,000 respectively. Perhaps, that’s just a technical detail. But, it raises another question.
Since “all other tax brackets would remain as they are today”, families with taxable incomes between $164.550 and $200,000 will see their marginal tax rates drop from 33% to 28%, or does Obama’s “simplified tax plan” introduce still one more marginal tax bracket?
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With respect to capital gains (and dividends), Obama’s web site says ” Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today. For those in the top two income tax brackets – likewise adjusted to affect only families over $250,000 – Obama will create a new top capital gains rate of 20 percent.”
Perhaps I’m just quibbling over details, but exactly how will this work?
For example, say a family has $300,000 AGI made up of $250,000 in wages and $50,000 in capital gains, and that they have $51,000 in itemized deductions. Their taxable income is $249,000. According to Forman, Goolsbee, and the Obama web site, their marginal tax rate stays at 28% and their capital gains rate stays at 15%.
What if they only have $49,000 in itemized deductions? Then, their taxable income is $251,000. Uh-oh.
Their marginal tax rate jumps from 28% to 36% (the lower of the top two brackets under the Obama Plan), and, their capital gains rate goes to 20%. But, what exactly does that mean? Does the 20% rate get applied to all $50,000 of their capital gains, or to just $1,000 of their capital gains — the excess over the $250,000 threshold?
For Team Obama, this is probably a just another ” technical detail” to be brushed off. For a taxpayer, it is a 33% difference in the amount of capital gains and dividend taxes paid.
Also, note that there is no mention is made regarding “individuals with incomes below $200,000”. Is that just an oversight, or should one assume that for capital gains (and dividends), individuals are families of size one?
Regardless, it looks to me like the old marriage penalty is creeping it’s way back into the tax code via the income triggering thresholds. For tax purposes, married couples may find themselves paying higher dividend and capital gains taxes than their income-comparable single friends.
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Finally, regarding the 12.4% additional payroll taxes on wages over $250,000 with the laughable provision that they’ll start in 10 years – so the next President will have to deal with it.
Currently, Social Security benefits are explicitly coupled (by formula) to employees’ taxed wages which, of course, determine the employees fixed rate contributions to the Social Security Trust Fund. Does Obama propose paying high-earners benefits linked to their added contributions, or does he propose redefining the Social Security program by completely de-coupling wages, contributions, and benefits ?
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Perhaps Forman and Goolsbee will be clarifying their clarification.
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