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07-20-2012, 07:44 AM   #1
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How much more would you pay with Obama's tax hike?

How Much More Would You Pay with Obama?s Tax Hike?

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The fierce debate over President Obama’s plan to hike taxes on families with incomes above $250,000 a year has mostly revolved around ideologically-fueled disputes about the impact on the broader economy—and has ignored the consequences for individual taxpayers.

Republican presidential challenger Mitt Romney predicts an increase would cripple growth as tens of billions of dollars flow away from the private sector each year, while Obama claims that a beleaguered middle class would suffer from the brunt of spending cuts needed to preserve the lower rates that were first introduced by President George W. Bush in 2001 and 2003. Voters heading to the polls in November will decide not just the occupant of the Oval Office, but what income tax rates will look like starting in 2013.

So what would it mean for the roughly two million American families and individuals on the higher end of the spectrum? That crucial question has escaped the partisan bickering so far.

For most, it’s likely a modest bump, according to independent analyses. At incomes above $1 million—about 378,000 people—the government would start extracting sums equal in size to a salaried job, and after that point the magnitude of the increases would snowball in exponential terms.


“The vast majority of people who are above these thresholds would face small to moderate tax increases, if they face increases at all,” said Joe Rosenberg, a tax policy researcher at the Urban Institute.

The numbers look intimidating at first. Obama would raise the tax rate from 33 percent to 36 percent on household incomes between $247,000 and $398,350. (The ceiling for individuals is $200,000.) Any earnings above that would be taxed at 39.6 percent, compared to the current top level of 35 percent. For those above that ceiling, tax rates on capital gains and dividends would also climb, a key change since many retirees and wealthy individuals derive their income from investments.

But families with $250,000 to $300,000 in taxable income would on average owe an additional $199 a year, according to projections drawn from Census and IRS data by the progressive Citizens for Tax Justice. That works out to $16 a month, enough to reduce the number of afternoon stops at Starbucks but not so devastating that the beach vacation gets canceled.

“What gets lost in this debate is a lot of people in that range aren’t going to be affected,” said Nick Kasprak, who has analyzed Obama’s proposal for the non-partisan Tax Foundation and created an online calculator to see estimated tax bills.

That’s not quite the warning being sounded by Romney, who blasted the proposal this month to the conservative radio show host John Fredericks as “a massive tax increase job creators and on small business.

“This will be another kick in the gut to the middle class in America,” he continued.

Many families will have thousands of dollars in deductions that either put them slightly above or just below the $250,000 threshold. And because the United States has a marginal tax system— charging a smaller rate at each level of less income—much of their earnings would be protected from the increases called for by Obama and congressional Democrats.

The marginal system is a critical element that often gets glossed over in the political debate, distorting how people think about the proposal. Obama, in some ways, has mischaracterized his position by saying it’s a return to the policies of President Clinton during the 1990s, a period associated with the prosperity of the tech boom.

“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 -- back when our economy created nearly 23 million new jobs, the biggest budget surplus in history, and plenty of millionaires to boot,” Obama said in a White House speech earlier this month.

But due to the marginal system, the country would not return to a Clinton-era tax code. Obama favors keeping the lower rates established by Bush for all earnings under $250,000 for at least one year. Even the wealthiest who would sacrifice a little more for the good of the federal budget would still benefit from those lower rates.


If the full Clinton tax code was restored, those same families earning $250,000 to $300,000 could have legitimate reason to protest. Their bill to the IRS would surge by $10,259, according to Citizens for Tax Justice.

“We’re a little amazed by this actually,” said Steve Wamhoff, legislative director for the organization. “There are some people who don’t realize that Obama would be extending tax cuts for a lot of wealthy people.”

The nature of the debate is muddled a bit by a host of other tax issues that shape the blitz of competing economic studies and analyses. For example, an Ernst & Young study released this month on by the National Federation of Independent Business includes in its model—which projects the loss of 700,000 jobs— a separate tax increase associated with Obamacare.

What’s clear is that the further up someone is on the economic food chain, the more those Bush-era cuts disappear and the higher the tab with the IRS. In other words, the political debate is really about whether multi-millionaires and billionaires should face a substantially higher tax burden, rather than those with relatively generous salaries but middle class lifestyles.

The Tax Foundation calculator estimates that a typical two-child household with $400,000 in salary and investment income would pay $3,541 more in taxes under Obama. Those figures build to the point that a family earning $10 million to $20 million would see their bill balloon by almost $700,000.

And that reflects the underlying philosophical difference between Obama and Romney. To Romney, this group includes job creators whose business incomes are taxed at individual rates (pass-through taxation). These include partnerships in professions like law and medicine as well as small individual business owners who may not hire additional workers if their incomes are dramatically reduced. By contrast, Obama looks at the economic troubles across his time in office and concludes that prosperity will not trickle from the top, saying this month, “We’ve tried it their way. It didn’t work.”




07-20-2012, 09:01 AM   #2
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QuoteOriginally posted by Nesster Quote
The Tax Foundation calculator estimates that a typical two-child household with $400,000 in salary and investment income would pay $3,541 more in taxes under Obama. Those figures build to the point that a family earning $10 million to $20 million would see their bill balloon by almost $700,000.

And that reflects the underlying philosophical difference between Obama and Romney. To Romney, this group includes job creators whose business incomes are taxed at individual rates (pass-through taxation). These include partnerships in professions like law and medicine as well as small individual business owners who may not hire additional workers if their incomes are dramatically reduced. By contrast, Obama looks at the economic troubles across his time in office and concludes that prosperity will not trickle from the top, saying this month, “We’ve tried it their way. It didn’t work.”
How typical is it to have a W-2 job with a $400,000 salary? Not very, at least not around here, maybe on wall street, but here most people with that kind of income have it from businesses, partnerships, or royalties
07-20-2012, 09:10 AM   #3
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If people making $40,000 or less see what Romney wants in his tax plan he would be dead meat in November.
07-20-2012, 09:14 AM   #4
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QuoteOriginally posted by mikemike Quote
How typical is it to have a W-2 job with a $400,000 salary? Not very, at least not around here, maybe on wall street, but here most people with that kind of income have it from businesses, partnerships, or royalties
Yes, that was not a well formed sentence - they meant to say, calculate the effect on a representative family making $400K.

07-20-2012, 09:59 AM   #5
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I don't think we will see much impact one way or the other. The UK is rolling back their 50% marginal rate on top earners after it failed to produce half of the projected revenue. They are rolling it back 5%. We will see what happens.

Since 1954 the America has seen some pretty big swings in corporate tax rate as well as marginal tax rates for the top earners. We have seen big swings in capital gains taxes, estate taxes, and personal income taxes. The funny thing is that Federal tax revenue has always been between 17% and 18% of GDP regardless of the tax rates.

There seems to be a theme in Washington where tax rates are designed to maximize revenue which is putting the cart before the horse. Tax law should be written to grow the economy, not to generate revenue. Assuming the government is always going to get 17-18% of the economic pie, the goal of planners should be to put policies in place that grow the pie as much as possible for everyone. Instead we see government implementing tax policy that actually reduces revenue. The goal of a significant number of taxes is not to raise revenue or grow the economy. The goal a significant number of taxes is to control the behavior of the population, and these taxes actually shrink revenue and the economy.

Ultimately we don't have a tax revenue problem. The projections for the tax revenue generated by the new plan is around $900 billion over 10 years, but spending for that period is projected to be $47 Trillion over this time period. Given that tax plans never generate the amount of money claimed and government always spend more than they budget for, the entire debate is more political than economic.
07-20-2012, 10:12 AM   #6
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QuoteQuote:
Tax law should be written to grow the economy, not to generate revenue.
Since 1972 there is no need for the Fed to ever generate revenue......
07-20-2012, 10:23 AM   #7
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QuoteOriginally posted by jeffkrol Quote
Since 1972 there is no need for the Fed to ever generate revenue......
I finally figured it out. You have a mushroom as your profile picture because you live in Wonder Land.
07-20-2012, 10:27 AM   #8
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QuoteOriginally posted by Winder Quote
Tax law should be written to grow the economy, not to generate revenue...the entire debate is more political than economic.
A primary function of taxation is redistribution of wealth. I wouldn't want to live in a society where the official line is "the more you're able to pay the less you'll be expected to pay". I earn a fair amount and pay a fair whack in taxes. Would I like to pay less? Sure. Do I believe I should? Nope.

If a country is to be asked to endure continuing hardship, then there needs to a perception of fairness. Why should those with the smallest waists tighten their belts the most? So, yes there is always a political dimension to tax policy: it reflects the sort of society that your elected government would like to see.

Democracy or plutocracy. I guess you guys will get to choose in November.

07-20-2012, 11:30 AM   #9
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QuoteOriginally posted by Winder Quote
I don't think we will see much impact one way or the other. The UK is rolling back their 50% marginal rate on top earners after it failed to produce half of the projected revenue. They are rolling it back 5%. We will see what happens.
The lowering of the top rate of tax in the UK was done on idealogical, not economic grounds. It has spectacularly backfired as it still had to be financed, was accompanied by a range of cuts that would impact on those in lower tax brackets (ie less well off), have unforseen consequences (google "pasty tax") and affect charitaies This suggested that the government was out of touch (really??) and that we weren't "all in this together" which we never were anyway with the posh boys in charge. They've since performed a number of policy U turns and have been increasingly on the back foot ever since.
07-20-2012, 12:29 PM   #10
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QuoteOriginally posted by Winder Quote
I finally figured it out. You have a mushroom as your profile picture because you live in Wonder Land.
Prove me wrong............... w/ something past 1972...
and here I thought you would be happy if I said we should cut ALL fed taxes....
Taxes are used to sop up excess money in the economy. Money is "spent" to increase supply when it is not being generated in the private sector (or as an addition to it)
BTW: You do REALIZE the social consequences if what I say is indeed true...which it is........

More Musings on Modern Monetary Theory | CEPR Blog
It is quite simple.......
QuoteQuote:
I think that all MMTers believe that the government cannot literally spend without limits. In other words, we can push the economy to the point where inflation is a real problem. The MMT answer is to raise taxes to prevent inflation from getting out of control.

Now suppose we are in the world where we have pushed the economy to the point where inflation is a problem and we decide we want the government to spend more money on some great project. At that point, it would seem that MMTers would have to agree that we need tax increases to offset the impact of government spending in boosting the economy.

We don’t literally need the tax increases to pay for the spending. The Fed could simply create more money to finance the spending. However if we don’t want the spending to be inflationary, then it must be offset by a tax increase.

I think the difference between the MMTers and Krugman is largely on the frequency with which they believe that the economy is up against its capacity constraints so that inflation is a real issue. I don’t want to put words in Krugman’s blog, but my guess is that he believes that the U.S. economy is typically operating near its capacity, so that the story of needing tax increases to offset spending would in general apply.

The current situation is an exception in this respect. Krugman has been as loud and clear as possible about the need for spending to boost demand in the current context, without any offsetting increase in taxes.

For my part, I think the cases where the economy has been near its constraints have been the exception. I think the economy was arguably facing supply constraints at the end of the 90s when the unemployment rate fell to a 4.0 percent year-round average in 2000.

I don’t think we hit supply constraints at any point in the following decade, which is why I could not get all that upset about the Bush tax cuts. It was not a good idea from the standpoint of either economics or equity to focus tax breaks on high income taxpayers, but if we had the same spending policy in the years 2001-2007 without the tax breaks I think the recovery would have been weaker and unemployment would have been higher. In other words, the tax breaks were better than no tax breaks, but had they been structured to be more progressive, they would have provided more boost to the economy. And, spending on infrastructure, education, and research and development would have been even better.
Addendum;
QuoteQuote:
Dean Baker gets it !
written by Dan Lynch, April 09, 2012 4:44 PM
I'm pleased to see that you mostly understand MMT on the issue of taxation and spending and inflation.

There are nuances, however . . .

Not all inflation is caused by US fiscal and monetary policy. If the Sauds decide to raise the price of oil, or if the Chinese bid up the price of copper, or if the Russian wheat harvest fails, that will likely cause "cost-push" inflation in the US. We had that in the 70's due to oil, and we have experienced a bit of it lately, even though the US economy is far below capacity.

So . . . I suggest that when setting US monetary & fiscal policy, we should distinguish between inflation that is caused by external shocks to commodities vs. inflation that is due to the US economy running at 100% capacity. Unfortunately, the Fed does not seem to make that distinction.
AND show me the Defense Dept "trust fund" and how "broke" it is..
Let's see.. 10 plus years of 2 war spending .. err -a trillion or so... on the positive ledger side of funding.. Z...E...R...O...
(sorry I just love throwing that one out there)

Last edited by jeffkrol; 07-20-2012 at 12:35 PM.
07-20-2012, 12:55 PM   #11
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QuoteOriginally posted by Nesster Quote
Yes, that was not a well formed sentence - they meant to say, calculate the effect on a representative family making $400K.
So if a doctor responds to the increased taxes by having his (formerly) stay at home wife help out with office duties instead of paying an office manager who relies on that job, what has the effect of taxes been? It created a job for his wife and destroyed a job for someone else so the net effect might look like zero but in reality it is detrimental to society.
07-20-2012, 12:59 PM   #12
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Mike, for a $3,500 increase in taxes? I suppose the doctor had the wife work in the office during Reagan through Clinton, and only hired the office manager when George Bush cut his taxes?
07-20-2012, 01:28 PM   #13
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QuoteOriginally posted by mikemike Quote
So if a doctor responds to the increased taxes by having his (formerly) stay at home wife help out with office duties instead of paying an office manager who relies on that job, what has the effect of taxes been? It created a job for his wife and destroyed a job for someone else so the net effect might look like zero but in reality it is detrimental to society.
I don't run a private business so I could be wrong, but I don't think that how business works. Employees aren't a personal expense, they're a business expense, right? So you run a business and pay yourself, say, $200,000 pa. If your personal tax expense goes up by $2,000 or whatever that in no way affects how much it costs to employ someone else. You may choose to get round the personal increase X by taking an additional X out of the business at the cost of somebody's job, but that would make you:
  1. Possibly guilty of embezzlement
  2. Certainly a w*nker.
07-20-2012, 02:02 PM   #14
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QuoteOriginally posted by mikemike Quote
So if a doctor responds to the increased taxes by having his (formerly) stay at home wife help out with office .
she'd leave him for a wall st exec...
07-20-2012, 02:07 PM   #15
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Doctors are getting hit from several angles between taxes based on income, being squeezed by ACA, being forced to adopt regulations such as EMR, and as employers paying health insurance for their employees.

This example was fresh because I was just at the dentist and his wife was there and she is now pitching in full time because they have reduced their staff (excluding her husband and her) from 6 to 5 (through attrition not firing someone) and they are uncertain how everything will shake out.

I don't own a business either but for most people, especially small companies hiring and firing isn't something that is done lightly. Reducing staff doesn't always have to be as a result of firing someone. And there are a lot more expenses involved than simply salary when it comes to hiring someone.
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