Obama Proposes Big Tax Increases, But Not 65% Big

 
 
October 31, 2008
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Throughout this election season, we have lamented the misinformation about the candidates' tax plans that has flowed from both sides of the aisle.  The Obama campaign has attacked John McCain's health care tax credit proposal, actually a $1.3 trillion net tax cut, as a massive tax increase.  Meanwhile, McCain accused Obama of supporting "a tax on electricity" because Obama backs restrictions on carbon emissions—a policy McCain has also endorsed.

This week at National Review's The Corner, we've seen two posts overstating the size of Barack Obama's proposed tax increases.  While Obama is proposing significant tax increases on high-income individuals, it is possible to overstate the size of his proposals, and NR bloggers have done so.  First, Mark Levin misdescribed the Obama tax plan as a complete repeal of the Bush tax cuts, with some help from American Thinker.  (Ramesh Ponnuru quickly responded that this isn't the Obama proposal.)

Today, Victor Davis Hanson vastly overstated the scope of Obama's proposed tax increases on high-income taxpayers.  Hanson managed even to outdo RightChange.com, asserting that some taxpayers would see a total income/payroll tax rate of about 65%:

As I recall, the Clintons never introduced legislation repealing the caps on payroll/Social Security taxes. Obama has; and so the new exposure to the 12.4% on self-employed income, coupled with the 2.9% contribution for Medicare, would mean that on self-employed income (and that would be the more likely target), we are talking about a 15.3% tax hike, added onto a 5% additional tax raise on income (34% to 39%).

One can support or reject Obama's plans, but he should at least admit he is not at all going back to the 1990s, but proposing something quite radically new: that anyone in America who makes over $250,000 (the targeted amount seems to change frequently), would pay a new additional tax of 19.3% on their income. And in some states with a 9% state income tax rate, coupled with the 2.9% Medicare rate, one can see that a total tax bite, federal, state, and FICA/Medicare, of at least about 65% of their income, aside from proposed increases in capital gains and inheritance taxes.

This is wrong in several places.

"Anyone in America who makes over $250,000... would pay a new additional tax of 19.3% on their income."

Saying high-income earners would pay a new percentage tax "on their income" conflates total and marginal tax rates.  To the extent Obama raises the top two income tax rates or adds a FICA tax for income over $250,000, he increases only marginal tax rates by a stated percentage; a taxpayer's total tax rate (income divided by tax, or tax paid "on their income") would rise by a smaller percentage.  The exact percentage depends on the individual taxpayer's circumstances.

Further, the 19.3% increase figure is greatly overstated, even as a measure of marginal tax rates.  Hanson arrives at the 19.3% figure by summing three components, two partly false and one totally false.  (Note: I recognize the three items below actually sum to 20.3%, however the text of Hanson's post indicates he intends 19.3% as a sum of these three tax increases.)

  • A 5% increase in the top marginal rate from "34% to 39%."  In fact, the current top marginal rate is 35%, and Obama would let it rise to 39.6%, for an increase of 4.6%.  Furthermore, this increase would not apply to "anyone in America who makes over $250,000"; for 2008, the top tax bracket kicked in at $357,700 of federal taxable income for single and married filers.  So, this tax increase is smaller than Hanson claims and doesn't apply to all taxpayers earning over $250k.  Partly false.
  • Application of the 12.4% FICA (Social Security) tax to individual income above $250,000.  However, in an August op-ed column in the Wall Street Journal, Obama's economic advisors Jason Furman and Austan Goolsbee wrote that "Sen. Obama does not support uncapping the full payroll tax of 12.4% rate. Instead, he is considering plans that would ask those making over $250,000 to pay in the range of 2% to 4% more in total (combined employer and employee). This change to Social Security would start a decade or more from now."  So, Obama's proposed increase would likely be much smaller than Hanson says and wouldn't start until at least 2018.  Also partly false.
  • Application of the 2.9% Medicare tax to all income.  While this tax would be applied under the Obama plan, it is also current law (and, indeed, would also be applied under the McCain plan, just as President Bush has applied it.)  Thus, it is not a tax increase at all.  Totally false.

Instead of 19.3%, the correct figure would be something in the ballpark of 6.1% (4.6% increase in the top income tax rate, plus a 1.5% increase in the top marginal rate for many high-income taxpayers due to rules phasing out deductions and exemptions), or 10.1% after 2018 if Obama levies a 4% FICA tax on incomes over $250,000.  And again, that marginal tax rate increase wouldn't apply to all taxpayers with incomes over $250,000, because some would not be in the top tax bracket.

Later on, Hanson says:

"And in some states with a 9% state income tax rate, coupled with the 2.9% Medicare rate, one can see that a total tax bite, federal, state, and FICA/Medicare, of at least about 65% of their income."  (Emphasis added.)

Here, Hanson again conflates marginal and total tax rates.  Even if Hanson were correct that the Obama plan would expose some taxpayers to a 65% marginal tax rate (and that claim, based on the assumptions above, is false) it would not expose them to "total tax bite" of 65% of their income.

More broadly, Hanson contests Obama's frequent theme that he would merely return high income taxpayers to the rates they paid during the 1990s under Bill Clinton.   It is true that, if enacted in 2018, the new 2-4% FICA tax on incomes over $250,000 would represent an increase over the Clinton era.

However, the return to a 39.6% top income tax rate and a 20% capital gains rate for high earners would both represent returns to pre-Bush tax cut law.  And high earners, under Obama, would still pay a lower-than-Clinton rate on the part of their income that is taxed under the first four income tax brackets (that is, the first $208,850 in taxable income for most married filers as of 2008.)

Since those tax benefits do not apply at the margin, they are essentially a lump-sum savings to taxpayers and do not encourage economic output in the way that top marginal tax rate cuts would.  Essentially, Obama would keep some tax benefits for high-income individuals but junk the ones that are most conducive of economic growth.  That's a shame, but it's still not a 19.3% tax increase on anybody.

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