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Obama-GOP Compromise Tax Plan on TPC’s Tax Calculator
Posted by: | CommentsIn a flurry of lame-duck activity, Congress quickly passed the Obama-GOP compromise tax plan and the president signed it into law. TPC has incorporated the new law into its Tax Calculator so you can see how the act will affect individual tax bills.
The Tax Calculator lets you compare tax liabilities under the new tax law against what taxes would have been if Congress had simply extended all of the 2001-03 tax cuts or had allowed them to expire as scheduled. As in earlier versions of the calculator, you can look at ready-made examples or create your own case. See what taxes will be this year and what they’ll be in 2011. Turn on the AMT patch or see what would happen without it. There’s no better way to see how the new law will affect taxpayers.
Resurrecting the Estate Tax as a Shadow of Its Former Self
Posted by: | CommentsFor nearly a year, we’ve had no federal estate tax. The estates of those who died in 2010—including at least five billionaires—have passed to their heirs with nothing going to Uncle Sam. Compared to the estate tax in place in 2009, the tax hiatus cost the government an estimated $14 billion in desperately needed revenue.
The compromise tax bill worked out by President Obama and congressional Republicans would reinstate the tax for 2011 and 2012 with a $5 million exemption and a 35 percent tax rate. Though obviously a tax increase compared to what estates pay this year (i.e., nothing), that would be much less onerous for the wealthy than the $1 million exemption and 55 percent top tax rate that will take effect in January if Congress makes no changes. Absent congressional action, about 2 percent of estates would pay the estate tax (see red point on graph); under the compromise agreement, less than a tenth as many would owe anything (blue dot). That 0.2 percent would be the smallest percentage of estates owing tax since at least 1934 (other than 2010, when the one-year hiatus exempted every estate).
Those relatively few estates—just 3,600 by TPC estimate—would pay much less tax: an average of just over 14 percent of the estate’s value compared with about 19 percent if the law isn’t changed. According to the Joint Committee on Taxation, that will cost the federal government $68 billion in forgone revenue over the coming decade.
House Democrats have called for returning the estate tax to its 2009 level: a $3.5 million exemption and a 45 percent tax rate. That move would impose tax on a few more estates—an estimated 6,500 in 2011—and would raise the effective tax rate to roughly the same 19 percent that current law would claim. Making that level of tax permanent would save more than $35 billion over the next three years compared to the compromise proposal but would still lose more than $250 billion between now and 2020 compared to what would happen if Congress made no changes in the law.
Given the nation’s dire fiscal straits, with huge deficits predicted to swell rapidly, it’s hard to justify giving up nearly $70 billion in revenue that only the wealthiest two-tenths of one percent of people would pay. Congress and the president can justify many of the tax cuts in the compromise bill as stimulus badly needed while our economy is still weak and unemployment remains sky-high. But cutting the estate taxes for the wealthy will do little or nothing to boost the economy and only represents further fiscal irresponsibility.
The Obama-GOP Deal: A Tax Hike for the Working Poor
Posted by: | CommentsEver since the 2008 presidential campaign, President Obama has argued passionately for extending the Bush-era tax cuts for all but the richest 2 percent of Americans. His reasoning: the rich have fared spectacularly well over the past quarter century—incomes of the top 1 percent tripled in real terms—while incomes grew slowly or not at all for those further down the income scale. Now, in compromising with congressional Republicans, the president seems to have forgotten his own logic and agreed to big tax cuts for the rich and tax increases for the poor.
Why would the working poor pay more? Because the proposal would replace this year’s Making Work Pay (MWP) credit with a temporary reduction in the Social Security payroll tax from 6.2 percent to 4.2 percent. That’s a good deal for high earners, who got nothing from MWP (thanks to an income phaseout), but a bad deal for those making $20,000 or less.
The math works this way: The MWP credit gave as much as $400 to each single worker and up to $800 to couples. If you’re single and earned at least $6,452 (and less than $75,000) in 2010, you got $400. Married couples with earnings over $12,903 (and less than $150,000) got $800.
But you won’t get $400 from the payroll tax cut until your earnings reach $20,000; earnings have to be twice that high to yield the $800 that MWP gave to couples. So single taxpayers who earn less than $20,000 and married couples earning less than $40,000 will pay more in taxes under the payroll tax cut than under MWP (see graph). Like everyone else, those folks will keep their Bush-era tax cuts and everything else that would continue from 2010 into 2011. But because no other provisions would cut their 2011 taxes relative to 2010, those taxpayers are unequivocally worse off under the compromise in 2011 than under the tax law we have this year.
By contrast, the rich would get much better treatment from the swap of MWP for the payroll tax cut. If you’re single and earn more than $106,800 (the maximum earnings subject to Social Security tax in 2011), you’d pay $2,136 less in payroll taxes. Since you got nothing from MWP—it phased out for high earners—your net gain would be the full payroll tax savings. A couple in which both spouses earn more than the payroll tax cap would get double that much—$4,272.
If Congress and the president accept the compromise in its current form, a single worker earning $10,000 will see her taxes jump by $200 from this year to next—her $200 payroll tax cut replaces her $400 MWP. And a couple earning $25,000 would lose $300 as its $800 MWP morphs into $500 in payroll tax savings. Nothing else in the compromise tax agreement compensates for those losses.
At the top of the income distribution, the wealthy would not only keep all of their savings from the Bush-era tax cuts like everyone else but would get the additional $2,000+ in payroll tax savings ($4,000+ for a couple). And, should they happen to die during the next two years, their estates could save millions more because of the estate tax’s proposed higher exemption and lower rate.
The president can argue that he had to compromise to protect low- and middle-income Americans from a big tax increase in 2011. But the agreement turns on its head his repeated argument that we need to give more to the poor and ask more of the wealthy. No wonder Democrats in Congress are mad.