Tuesday, November 4, 2008

Obama and Taxes

Early on, Obama threw out several different figures for what he wanted to raise the capital gains rate to. I’ve heard 20%, 25%, and 28%. In the past several months, he has settled on 20%.

Obama wants to raise the top two income tax brackets from 33% to 36% and 35% to 39.6%. In 2008, the break point to jump into the 33% bracket for married filing jointly was $200,000. Unclear to me if Obama would move the break point up to $250,000.

In addition, he wants to remove the Payroll tax cap for those earning over $250,000. At first everyone assumed that would mean an additional 15.3% tax hike. Now Obama campaign is being purposely vague on how much they would raise payroll taxes for over $250K.

If Payroll cap was removed at full 15.3%, top marginal rate would raise to about 55%! On top of that, Obama wants to phase out some credits and deductions that effectively raise it even higher. We would suddenly have close to the highest top income tax rate in the world.

Just remember this. In 2006:
  • Top 1% earned 22% of income, paid 40% of income taxes
  • Top 10% earned 47% of income, paid 71% of income taxes
  • Top 50% earned 87% of income, paid 97% of income taxes
  • Bottom 50% earned 13% of income, paid 3% of income taxes
  • Bottom 40% pay no income taxes

This is already a highly progressive income tax system. Obama would significantly increase the progressivity.

Obama wants to give $1000 refundable tax credit to everyone, including the bottom 40% who do not pay any income taxes. Obama calls it a tax cut off of workers’ payroll taxes. This would fundamentally change social security to a welfare program.

The worst part about Obama’s tax plan is that it raises effective marginal tax rates, and thus discourages productivity, at both ends, because he has many deductions and credits that phase out as income levels increase. That is, for lower income earners who do make enough to pay federal income taxes, as they start to make more money, they lose some of their deductions and credits. Combined with payroll taxes, effective marginal tax rates on a family of four making as low as $30,000 would be over 40%.

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