The Myth OF THE GO BACK TO Clinton-era Taxes

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The declare that the president’s plan would only take the top tax rates back to Clinton levels isn’t quite right. 250,000 for maried people), while making the taxes cuts long lasting for all the taxpayers. The analogy with the Clinton years is a little questionable. During those full years, a Democratic chief executive and Republican Congress worked to restrain federal government spending and balance the budget jointly, a long way off from current plan.

In any case, as I describe in the September issue of the American Enterprise Institute’s Tax Policy Outlook, the declare that the president’s plan would only take the top tax rates back again to Clinton levels isn’t quite right. Or, rather, it’s right for only the first 2 yrs of the president’s plan.

Thanks to a little-known provision in the new health care laws, the president’s plan will force the top tax rates for most types of income above Clinton levels in 2013 and thereafter. If the Bush high-income rate reductions expire, it’ll be the Obama administration’s second move to raise the top marginal taxes rates.

In 2010, the top income tax rate bracket for ordinary income is 35 percent. Besides wages and interest income, this income category includes earnings from pass-through business firms-sole proprietorships, partnerships, and S-corporations. Beneath the president’s proposal, the very best bracket shall rise to 39.6 percent. A stealth provision that phases out high-income taxpayers’ itemized deductions will also be reinstated, adding another 1.2 percentage points to the effective tax rate, bringing it to 40.8 percent. Wages plus some of the pass-through income will also stay subject to a 2.9 percent Medicare tax.

These 40.8 and 43.7 percent taxes rates, which will apply in 2011 and 2012, match the 1994 to 2000 rates-the same top bracket, stealth provision, and Medicare taxes then were in place. However the picture changes in 2013. Beneath the healthcare law followed in March, the Medicare tax will rise that 12 months, from 2.9 to 3.8 percent. Also, a fresh 3.8 percent tax, called the Unearned Income Medicare Contribution (UIMC), will be imposed on high-income taxpayers’ interest income and most of their pass-through business income that’s not at the mercy of Medicare taxes.

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So, under the president’s proposal, virtually most of top earners’ ordinary income will be taxed at 44.6 percent, starting in 2013. We’re not only going back to the Clinton-era rates of 40.8 and 43.7 percent. An identical pattern keeps for capital increases. Under the president’s plan, in 2011 and 2012, the very best rate on benefits, now 15 percent, goes to 20 percent, with the stealth provision adding 1.2 percentage points, sending the taxes back to its 1997-2002 degree of 21.2 percent.

Starting in 2013, though, capital gains will be hit by the UIMC also, pushing the pace to 25.0 percent. Under the president’s proposal, virtually all of top earners’ common income will be taxed at 44.6 percent, starting in 2013. We’re not only heading back to the Clinton-era rates of 40.8 and 43.7 percent.

Dividends may, or may not, face a much steeper taxes increase. In short, if the Bush high-income rate reductions expire, it’ll be the Obama administration’s second proceed to increase the top marginal tax rates. The first footwear has lowered, in the form of the UIMC. It’s bad enough that tax received little scrutiny or attention before it became regulation, with nary a congressional hearing to explore its economic impact.