April 27, 2024

You are here: Home / Archives for income tax rates

Economix Blog: When $250,000 Isn’t Actually $250,000

December 9, 2012 by Leave a Comment

Binyamin Appelbaum and I have an article in Friday’s paper about President Obama’s proposal to raise marginal income tax rates for married couples earning “more than $250,000.”

As we note, there are lot of couples earning more than $250,000 whose tax liability would not be affected.

There are two main reasons: inflation, and the very narrow way income is defined in this proposal.

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

First, the thresholds that Mr. Obama originally staked out – $250,000 for married couples filing jointly and $200,000 for single taxpayers – referred to policies he wanted to take effect in 2009, and he has been indexing most of them to inflation so that they’re higher today. The adjusted thresholds for 2013 are $266,100 and $212,850, according to the independent Tax Policy Center. Mr. Obama uses $250,000 as shorthand for the higher-income taxpayers the increases are aimed at — perhaps for consistency’s sake, and perhaps because $250,000 is a nice round number. (The White House declined to comment on why the president still uses the $250,000 number.)

Second, the thresholds refer to a specific accounting term called adjusted gross income, or A.G.I., that excludes a lot of categories of income.

Now, if you ask people how much they make, they probably don’t respond with their exact A.G.I. Instead they probably think about their salary, wages, pension income, and maybe a bonus and investment income if those categories brought in substantial money.

That rough mental accounting for how much you make would include some money not counted in A.G.I. (and exclude some money that is part of A.G.I.). In other words, a lot of people might have more than $266,100 flowing into their bank accounts during the year but still have an A.G.I. below $266,100.

A.G.I. includes wages, salaries, investment income and bonuses – the categories mentioned earlier that might be part of a quick mental accounting of how much you make. But it can also be reduced by subtracting items like certain business expenses; health savings account deductions; some moving expenses; contributions to some retirement accounts like an I.R.A.; alimony paid; most Social Security benefits; some income earned overseas; tax-exempt interest on municipal bonds; and college tuition, fees and student loan interest, subject to limits.

On the other hand, there are some categories in your A.G.I. that you might not think to include if someone asks how much you make. These include rents; royalties; income from operating a business; alimony received; share of income from partnerships and S-corporations; income tax refunds; and the ever-popular gambling winnings.

For example, a married couple might make $300,000 annually in salaries and investment income, but after subtracting health savings account deductions, alimony paid and I.R.A. contributions, they might have an adjusted gross income of about $270,000. That means they would probably not be affected by the tax increases aimed at “high income” people even though they are indeed near the top of the income distribution.

To make things even more confusing, note that some of the tax increases intended for “high income” people (using Mr. Obama’s stated $250,000 and $200,000 thresholds from 2009) will actually apply to even fewer people than this analysis so far suggests.

Those whose income exceeds those thresholds would be affected by new taxes created by the Affordable Care Act, including additional taxes on both their earned income and their investment income. (And here the thresholds are actually $250,000 and $200,000, with no indexing. All the other taxes aimed at “high income” individuals are indexed; for some reason the Affordable Care Act taxes were not.)

But many at those income levels will not be affected by the expiration of the Bush marginal income tax cuts for upper-income people. That’s because the Bush tax cuts refer to an even narrower measure of income called taxable income, which is basically a subset of adjusted gross income that many high earners can reduce substantially with the help of a skillful accountant.

Taxable income is calculated by subtracting personal exemptions and deductions (either itemized or standard) from adjusted gross income. Itemized deductions include things like home-mortgage interest payments, health expenses, state and local taxes, and charitable contributions. While subject to limits, those deductions can bey large. Generally the reason to go through the hassle of itemizing deductions, after all, is to reduce your taxable income by much more than the standard deduction would.

Mr. Obama has defined all the thresholds for whose taxes he wants to raise in terms of A.G.I. But again, tax rates are based on taxable income. Mr. Obama’s method of translating his A.G.I. cutoffs into taxable income cutoffs is to take the A.G.I. threshold and subtract the minimum amount a family is entitled to exclude: one standard deduction and two personal exemptions for married couples, totalling about $20,000.

So when Mr. Obama promises he won’t raise tax rates for married couples with a 2013 A.G.I. of $266,100, the policy translates to taxable income thresholds of about $246,000.

Those are conservative calculations for how much taxable income people with these levels of A.G.I. will report. Usually people at those A.G.I. levels choose to itemize their deductions, which reduces their taxable income.

If you have a lot of deductions and personal exemptions, you might end up reducing your taxable income by so much that you no longer fall into a tax bracket whose marginal tax rate Mr. Obama proposes to raise. (You might still be subject to the alternative minimum tax – a parallel tax system that basically says you have to pay at least a given share of your income, regardless of how many deductions you take – but you will not be hit by the higher marginal tax rates on earned income that Mr. Obama is proposing.)

For example, a married couple earning $300,000 in A.G.I. might have itemized deductions of about $50,000 and a child, which means three personal exemptions. This comes to a total of more than $60,000 in deductions and exemptions, meaning this couple would have taxable income below the president’s threshold for higher tax rates. In fact, about 70 percent of all couples in the $250,000 to $300,000 A.G.I. range in 2013 would be unaffected by Mr. Obama’s proposal to raise taxes on those earning over $250,000, according to Citizens for Tax Justice, a liberal advocacy group.

Remember that all these higher tax rates refer to marginal rates – the escalating rates on each successive tier of income – not average rates.

That means that even if you do earn enough in taxable income to be affected by the higher tax rates, not all of your income would be taxed at higher rates. Only the income above the thresholds would be subject to a higher tax rate under Mr. Obama’s plan. The first couple of hundred thousand dollars would be taxed at the same rates that now apply.

Article source: http://economix.blogs.nytimes.com/2012/12/07/when-250000-isnt-actually-250000-2/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Economix Blog: Q. and A.: Understanding the Fiscal Cliff

October 11, 2012 by Leave a Comment

In the first two days of 2013, large tax cuts passed in 2001 and 2003 will expire and across-the-board cuts to defense and nondefense programs in the government will begin a drastic and sudden hit to the economy — a so-called fiscal cliff — that both parties say could be damaging to the unsteady recovery. Here is a primer on the tax increases and program cuts and their potential impact on the economy.

How large are the prospective tax increases and spending cuts?

Almost everyone who pays taxes would see a hit to take-home pay in the first paycheck of January. The lowest income tax rate would rise to 15 percent from 10 percent. The highest rate would rise to 39.6 percent from 35 percent. The 25 percent, 28 percent, and 33 percent rates would rise to 28 percent, 31 percent and 36 percent respectively. Most capital gains taxes would rise to 20 percent from 15 percent. The tax rate on dividends, now set at 15 percent, would jump to ordinary income tax rates, and since most dividend taxes are paid by the wealthy, that would mean a new dividend tax rate of 39.6 percent. The exemption on taxation of inherited estates would drop to $1 million from $5 million. The tax rate above that exemption would jump to 55 percent from 35 percent.

Even many of the working poor who do not earn enough to face such taxes would take a hit when a temporary, two-percentage-point cut to the payroll tax that funds Social Security and Medicare expires on Jan. 1. In all, taxes would rise by as much as $6 trillion over 10 years, $347 billion in 2013 alone, if the Bush-era tax cuts expire along with the payroll tax cut, and Congress fails to deal with the expanding alternative minimum tax, according to the Congressional Budget Office and Decision Economics Inc., a private economic forecaster.

On the spending side, most defense programs would be sliced by 9.4 percent. Most nondefense programs outside the big entitlements — Social Security, Medicare and Medicaid — would be cut by 8.2 percent. Medicare would be trimmed by 2 percent. Social Security, veterans benefits, military personnel, Medicaid and the Children’s Health Insurance Program would be exempt.

What would the economic impact be?

Most economists and the nonpartisan Congressional Budget Office predict that if nothing is done, the twin impacts of broad tax increases and across-the-board spending cuts would send the economy back into recession. The 2013 impact alone — about $600 billion in tax increases and spending cuts — exceeds the projected growth of the gross domestic product. The Bipartisan Policy Center estimates that the cuts — called sequestration — could cost one million jobs in 2013 and 2014.

The Congressional Budget Office projected that real economic growth would decline at an annual rate of 2.9 percent during the first half of 2013. Unemployment would rise to 9.1 percent by the end of next year.

How did we get here?

President George W. Bush and Republicans in Congress could not muster the 60 votes in the Senate to pass Mr. Bush’s initial 10-year, $1.7 trillion tax cut in 2001, so they used a parliamentary tool called reconciliation to pass the tax cuts with a simple Senate majority of 51 votes. The catch was that this meant the tax cuts would expire after the 10-year budget window closed in 2011. In 2003, when Mr. Bush went back for another round of tax cuts, Republicans in Congress again used reconciliation to avoid a Democratic filibuster and maximized the initial size of the tax cuts by having them expire at the same time as the first tax cuts, in 2011.

After the 2010 elections, President Obama struck a deal with Republicans to extend the tax cuts for another two years, as well as add other tax measures, like the payroll tax cut, to help the economy. Now that extension is ending.

The across-the-board cuts are more complicated. The newly elected Republican House in 2011 refused to raise the debt ceiling, the nation’s statutory borrowing limit, without legislation guaranteeing that the increase would be at least matched by deficit reduction. Congress and the White House agreed to spending caps that shaved about $1 trillion off projected growth over 10 years. They also created a special, bipartisan deficit reduction committee to find another $1.2 trillion in savings over 10 years. If that effort failed, savings would be guaranteed by automatic cuts to both defense and nondefense programs beginning in 2013. The so-called supercommittee failed, and the government is now staring at the consequences.

How do we get out of it?

Some fledgling bipartisan talks have begun with an eye toward staving off the fiscal cliff after the election but before Jan. 1. The so-called Gang of Six searching for a deal includes Senator Richard J. Durbin of Illinois, the second-ranking Senate Democrat; Senator Kent Conrad of North Dakota, the Budget Committee chairman; and Senator Mark Warner, Democrat of Virginia, and three Republican senators, Tom Coburn of Oklahoma, Mike Crapo of Idaho and Saxby Chambliss of Georgia. In addition, Senators Michael Bennet, Democrat of Colorado, and Lamar Alexander, Republican of Tennessee, are trying to negotiate a framework moving forward that would set up a deficit reduction outline, instruct Congressional committees to make it real in six months, then punt the spending cuts and tax increases into next year.

Most of these negotiations accept that savings would have to come from entitlement programs like Social Security and Medicare, and an overhaul of the tax code that raises revenue by closing loopholes and curtails or ends tax deductions and credits. Most Republicans and some Democrats say they can generate additional revenue that way and still lower tax rates across the board.

The leadership is more hesitant. Senator Mitch McConnell of Kentucky, the Republican leader, and Senator Charles E. Schumer of New York, the third-ranking Democrat in the Senate, both say they want a sweeping deficit deal in the coming lame duck session of Congress to avert the cliff. But Mr. Schumer says he will not accept any deal that cuts the top income tax rates for the rich. The House speaker, John A. Boehner, Republican of Ohio, says he will not accept any deal that raises tax rates for the rich beyond the current Bush-era levels.

Where is President Obama on all of this?

Regardless of the results on Election Day, Nov. 6, Mr. Obama will be in office on Jan. 1. He has said he will not sign any bill that extends the tax cuts for the rich but wants legislation that extends the tax cuts for families earning $250,000 or less. That alone would be enough to mitigate the economic impact of the fiscal cliff. He also opposes across-the-board spending cuts, but says there should be no “easy off-ramp,” that is, he will not sign legislation simply canceling the cuts unless Congress comes up with a plan for deficit reduction at least equal to $1.2 trillion. Mr. Obama’s budget foresees about $4 trillion in deficit reduction over the next decade: $1 trillion already locked in with the 2011 Budget Control Act; about $1.5 trillion in additional revenues, largely from allowing tax cuts for the rich to expire; and another $1.5 trillion in additional savings. He has signaled he will accept changes to Social Security, Medicare and Medicaid as part of that last portion of savings. Republicans complain that Mr. Obama has not forcefully led his party to a deficit deal.

What if Mitt Romney wins?

If Mitt Romney, the Republican presidential nominee, wins, he will not be president until he is sworn in on Jan. 20. Since Mr. Obama says he will not accept an extension of tax cuts for more affluent families, Congress will most likely have to let the government go off the cliff. Mr. Romney says that in his first days in office, he will sign a temporary extension of all the tax cuts, effective retroactively to Jan. 1. He has said he will not allow the automatic cuts to happen, but he has not specified how he would do that.

Article source: http://economix.blogs.nytimes.com/2012/10/09/qa-understanding-the-fiscal-cliff/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Economix Blog: How Do the 47% Vote?

September 18, 2012 by Leave a Comment

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Mitt Romney asserted that the 47 percent of Americans who had no federal income tax liability would “vote for the president no matter what.”

Actually, a lot them don’t vote, and of those who do, many vote Republican.

There is, unfortunately, no data linking federal income tax rates directly to voting behavior. But we do have some demographic information about those 47 percent (technically, 46 percent, if you’re looking at the most recent year of data) of American households that don’t pay federal income taxes, and we can use those demographics to make some educated guesses about how those people might vote.

About half of people who don’t owe federal income tax owe nothing because their incomes are too low; that is, all of their income is exempted after they take the standard deduction and personal exemptions for taxpayers and their dependents. For the most part, these households make less than $30,000 a year.

In 2008, when voter turnout rates were at or around record highs, fewer than half (44.9 percent) of adults in households making less than $30,000 per year voted, according to Census Bureau data. And of those who did vote, a substantial chunk voted for John McCain, the Republican candidate: 25 percent of those making under $15,000, and 37 percent of those making $15,000 to $30,000.

What about the rest of households who don’t pay federal income taxes?

This group generally doesn’t pay federal income taxes because of various deductions and credits in the tax code, known as “tax expenditures.”

According to the Tax Policy Center, about three-quarters of these remaining households pay no income tax because of tax expenditures that benefit older people and low-income working families with children.

Older Americans vote in very high numbers. In 2008, 70.2 percent of people over age 65 voted, according to the Census Bureau. And in that election, older voters supported John McCain over President Obama by an 8-percentage-point margin, with 53 percent voting for Mr. McCain. The latest New York Times/CBS News poll, conducted last week, showed likely voters in the same age group supporting Mr. Romney by a 15-point margin – even wider than the gap on Election Day 2008.

It’s probably fair to assume, then, that many of the people who don’t pay federal taxes because they’re benefiting from expenditures aimed at older Americans will vote for Mr. Romney, not Mr. Obama.

Those benefiting from tax provisions for low-income working families with children are, by definition, poor, and as we’ve established, poor people lean strongly Democratic but they don’t vote in very high numbers.

The remainder of the households that don’t pay federal income taxes because of other miscellaneous tax expenditures (tax-exempt interest, itemized deductions, capital gains rates and so forth) are harder to pin down demographically, so it’s challenging to make educated guesses about their likely voting behavior.

Mr. Romney also said that this “47 percent” of people who don’t pay federal income taxes are the same people who are “dependent” on government services:

All right, there are 47 percent … who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it.

First of all, the nonpayers can’t be conflated with the service receivers; people of all incomes and tax liabilities receive government services, not just those who have no federal income tax liability.

Are the people who do depend more heavily on government benefits at least more likely to vote Democratic, regardless of their tax burdens? Maybe those are the people Mr. Romney had intended to imply would vote for Mr. Obama “no matter what.”

But as a portrait of the social safety net in The New York Times found last spring:

Support for Republican candidates, who generally promise to cut government spending, has increased since 1980 in states where the federal government spends more than it collects. The greater the dependence, the greater the support for Republican candidates.

Article source: http://economix.blogs.nytimes.com/2012/09/18/how-do-the-47-vote/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Economix Blog: Bruce Bartlett: Mitt Romney, Carried Interest and Capital Gains

September 11, 2012 by Leave a Comment

DESCRIPTION

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

The issue of Mitt Romney’s taxes continues to be a political liability for him. A NBC News/Wall Street Journal poll last month found that 36 percent of registered voters have a more negative opinion of him because of the issue, up from 27 percent in January, compared with 6 percent who have a more positive view.

Today’s Economist

Perspectives from expert contributors.

As I have discussed previously, the two years of returns Mr. Romney has been willing to release, for 2010 and 2011, show that he paid much lower effective federal income tax rates in both years than his running mate, Representative Paul D. Ryan, whose income was 85 percent to 90 percent lower than Mr. Romney’s in those years.

A key reason for Mr. Romney’s low tax rate is that a very substantial amount of his income comes from capital gains – 51 percent in 2011 and 58 percent in 2010. Capital gains, no matter how large, are taxed at a maximum rate of 15 percent, whereas wage income can be taxed as much as 35 percent by the income tax plus taxes for Medicare and Social Security. The latter two are not assessed on capital gains.

Significantly, much of Mr. Romney’s capital gains income achieved this treatment through a special tax loophole called carried interest. According to recently released documents, executives at Bain Capital, where Mr. Romney made the bulk of his estimated $250 million fortune, saved $200 million in federal income taxes and another $20 million in Medicare taxes because of the carried interest loophole.

The way the loophole works relates to the peculiar method in which money managers are compensated. Typically, they receive a fee of 2 percent of the gross assets under management, much of which comes from employee pension funds, plus 20 percent of any increase in value.

Thus, on $1 billion of assets the managers would automatically get $20 million that would be taxed as ordinary income. If the assets increased 10 percent to $1.1 billion, they would get another $20 million. For tax purposes, this additional $20 million would be treated as a capital gain and taxed at 15 percent.

The theory is that the money managers effectively become part owners of the assets they manage as a result of the fee structure. Critics contend that the distinction between the 2 percent and 20 percent fees is purely artificial — that in reality all their compensation should be treated as ordinary income and taxed as such.

Among the sharpest critics of carried interest is Victor Fleischer, a law professor at the University of Colorado. In a Sept. 4 post on DealBook, he explains that the New York attorney general’s office is looking into the issue, seeking to determine whether money managers have been illegally converting their 2 percent management fees into lower-taxed capital gains.

The New York Times recently commented in an editorial that while the carried interest loophole is unjustified, the core problem is lower tax rates on capital gains generally. Said The Times, “As long as income from investments is taxed at a lower rate than income from work, there will be no stopping the search for ways, legal or otherwise, to pay the lower rate.”

The view that capital gains should be treated as ordinary income for tax purposes is one that is widely shared by liberal tax reformers. They got their wish, briefly, from 1987 to 1990 because Ronald Reagan agreed to raise the tax rate on capital gains to 28 percent from 20 percent in return for a reduction in the top rate on ordinary income to 28 percent from 50 percent, as part of the Tax Reform Act of 1986.

There are three big problems, however, with taxing capital gains at the same rate as ordinary income. First, even if that were the case, capital gains would still be treated more beneficially, because the taxes only apply to realized gains. Those that are unrealized would remain untaxed. Investors needing cash could simply borrow against their assets to minimize their taxes, rather than selling and realizing a capital gain.

To equalize the taxation of capital gains and ordinary income, it would be necessary to tax unrealized gains. In theory, all increases in net wealth should be taxed annually, according to the economists Robert M. Haig and Henry C. Simons. But a 1920 Supreme Court case, Eisner v. Macomber, held that only realized gains could be taxed.

As long as a taxpayer decides when or if to realize gains for tax purposes, that is a very valuable loophole even if gains are taxed at the same rate as ordinary income. For one thing, a taxpayer can easily match gains with losses to avoid having net taxable gains. And, of course, capital gains would still avoid the 15.3 percent payroll tax, which applies only to wage income.

Second, there is a problem with inflation insofar as capital gains are concerned. Many academic studies have shown that a considerable portion of realized capital gains simply represent inflation, rather than real increases in purchasing power.

While theoretically capital gains could be indexed for inflation, it would be very complicated. For one thing, it is not clear what the appropriate price index should be. For another, there is the problem of also indexing losses. Historically, Congress has felt that simply excluding a certain percentage of capital gains from taxation was a better way to compensate for inflation.

Third, it is a fact of life that those with great wealth are the principal beneficiaries of the capital gains tax preference, and they exercise influence in our political system far out of proportion to their numbers. They will pressure both parties relentlessly to restore a lower tax rate on capital gains and eventually they will be successful. Keep in mind that two Democratic presidents, Jimmy Carter and Bill Clinton, signed cuts in the capital gains rate into law.

In short, it is a pipe dream to believe that eliminating the capital gains preference is the key to fixing the carried interest loophole. It can and should be addressed by treating carried interest as ordinary income, without requiring that all capital gains be taxed as ordinary income.

Article source: http://economix.blogs.nytimes.com/2012/09/11/mitt-romney-carried-interest-and-capital-gains/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,