MorganRants

Things I am passionate about. Injustice, stupidity, intolerance, bigotry and small-mindedness. Oh and there might just be some humor to offset the whole thing.

Tax Rates For New Yorkers Would Top 50% Under Obama

Posted by morganwrites on July 22, 2008

‘Significant Difference’ Is Seen For High-Income Areas Like the City

New York tax filers reporting more than $375,000 a year in earned income may end up paying nearly 60% of their wages in taxes to the government under a Barack Obama presidency, economists who have analyzed his plan said.

The Democratic presidential candidate is proposing not only raising the federal income tax, but also adding a Social Security tax for those Americans earning more than $250,000 a year. For New Yorkers, that could mean that if the current Social Security rate is applied, the marginal tax rate, or rate on every extra dollar earned, could rise to 58%.

“This is a very eye-popping number,” a resident scholar at the American Enterprise Institute, Alan Viard, said.

Under current law, there is a 12.4% Social Security tax on salaries up to $102,000 a year. While the Social Security tax is split equally between employers and employees, economists widely hold that employees shoulder the entire tax burden because employers simply pass along the cost of the tax in the form of lower wages.

Mr. Obama has spoken of creating a so-called doughnut hole, where those earning more than $250,000 would have to pay an additional Social Security tax; anyone earning between $102,000 and $250,000 would be exempt.

Mr. Obama has yet to clarify what that additional Social Security tax will be, although his campaign said it is not likely to be as high as 12.4%. Rather, it said the tax is not likely to run higher than 4%, translating into a marginal tax on wages of as much as 52% for New Yorkers, who are subject to income tax at the federal, state, and city levels. The current marginal rate is 42%, which would continue under the McCain proposal. Full calculations of these figures are available in the slideshow accompanying this article.

“Obama originally seemed to be saying he would apply the full 12.4%, although lately he seems to be backtracking,” Mr. Viard said. “One thing is for sure, you are going to see an increase of several percentage points on the marginal federal income tax from the Obama plan.”

Some observers said that raising taxes at a time when the economy is teetering on a recession could exacerbate the economic woes.

“If the economy remains soft through next year — and it seems unlikely that it will be robust — it would be a very bad time to raise taxes of any sort, but particularly to raise them in this way,” a professor who teaches federal tax law at Yale Law School, Michael Graetz, said.

The Obama campaign said it is too early to know the exact marginal tax rate because no plan has been finalized. “There is not a specific plan, it is something that Obama would want to work together with Congress to figure out,” the economic policy director for the Obama campaign, Jason Furman, said. In respect of the payroll tax rate on income above the doughnut hole, he said, “some of the plans we are looking at, and we are looking at a range of plans, think Congress might like to have rates that are in the neighborhood of 2% to 4%.” He added that the plan could also be phased in over a period of years.

There is also a difference between the marginal tax rate and the average tax rate, which is the rate that Americans pay as a portion of their overall income. The average tax rate under the Obama plan would be lower than the 52% figure because of deductions for charity, lower rates that apply to capital gains and dividend income, and other factors. “The average tax rate for the top 1% is, on average, about 20% under current law. Our plan would maybe be only two percentage points higher,” Mr. Furman said.

While the average rate will be lower, the marginal tax on wages is considered a critical measure because it “affects the incentive to work and report income to the Internal Revenue Service, as well as invest in legal and illegal tax shelters,” the director of the Tax Policy Center, a joint venture of the left-leaning Brookings Institution and Urban Institute, Len Burman, said. Mr. Burman recently authored a widely read study of the two candidates’ tax proposals.

In addition to tacking on a Social Security tax and raising the top income tax rate to 39.6% from 35%, the Obama campaign is also proposing limiting the value of itemized deductions. Known as “Pease,” the provision was named for Rep. Don Pease of Ohio and was instituted in the 1990s to help reduce the deficit. President Bush phased out much of the Pease, and Mr. Obama would restore it, tacking on a few additional percentage points to the marginal tax rate.

As for the alternative minimum tax, the two candidates do not differ widely, although Mr. McCain had originally called for its repeal. In addition, the AMT affects New Yorkers earning between $100,000 and $300,000, but does not impact those in the highest income bracket.

Mr. Obama is proposing to raise taxes on capital gains and dividends by two-thirds, moving the rate up 10 percentage points to 25%. When New York State and City taxes are added in, the tax rate would be 33%. In comparison, the tax rate for capital gains and dividends is currently 22%; this would continue under Mr. McCain’s plan, though some analysts say that if he won the presidency a Democratic Congress might maneuver him into an increase in these taxes, or pass an increase over his veto.

As for the estate and gift tax, Obama is proposing excluding anyone with less than $3.5 million, and charging a tax of between 15% and 45% for anything over the limit. McCain is proposing a $5 million exclusion and a flat 15% tax rate for anything over this limit.

The candidates’ tax plans reflect their philosophical differences, economists and political analysts said.

In the estate and gift tax, for example, Obama is treating it like an income tax, where children who come into a lot of money would pay the same rates as if they had been earning the money over time, a managing principal of tax policy at Deloitte, Clint Stretch, said. For McCain, the tax is more like capital gains, where the children are considered to have invested in the parents and therefore should pay something akin to a capital gains tax.

“While Senator McCain is saying that the Bush tax cuts are, in essence, correct, Obama is proposing to go even further than Bush in cutting taxes for the lower and middle classes and restore Clinton’s higher taxes for those with higher incomes,” Mr. Stretch said.

“Their tax plans highlight the dichotomy between the two candidates and their different approaches,” a partner at Grant Thornton and the director of its tax legislative affairs group, Melbert Schwarz, said. “Obviously in a high income area like New York City, you are going to have a lot of people who are in the highest income tax bracket, where Obama’s proposals could make a significant difference.”

‘New Yorkers – vote for Obama! He’s your man!’

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