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Obama's tax plan would spare many affluent families

  • Article by: CATHERINE RAMPELL and BINYAMIN APPELBAUM
  • New York Times
  • December 6, 2012 - 6:32 PM

President Obama's insistence that marginal tax rates rise for families making more than $250,000 has convinced millions of affluent Americans that they are likely to be writing larger checks to the government next year. But many of those families have no reason to fret.

A close look at the president's plan shows that a large majority of families making up to $300,000 -- as well as hundreds of thousands of families with even larger incomes -- would not pay taxes at a higher marginal rate.

Because the complexity of the tax code makes it difficult to draw clean lines, they are the beneficiaries of choices the administration has made to ensure that families earning less than $250,000 do not pay higher rates.

Some of those affluent households still would pay higher taxes next year under other parts of the president's plan and increases imposed by the Affordable Care Act, but not under the centerpiece, the part most opposed by Republicans.

John Boudreau, the president of a Connecticut construction firm who expects to make about $300,000 this year, said that was a welcome surprise. He voted for Obama and said he was ready to pay taxes at a higher rate. But he'd rather not.

"I'm willing to, but if it works that I'm not, so be it," he said.

Unless the White House and Congress are able to reach an agreement, federal taxes are set to rise sharply next year for a large majority of Americans. Tax cuts first passed in 2001 and 2003 under President George W. Bush are scheduled to expire. So are cuts passed during Obama's first term.

Portion subject to taxes

The president's plan would prevent most of the scheduled increase for those below an income threshold Obama generally describes as $250,000. The Senate has passed similar legislation. But Democrats remain at loggerheads with House Republicans, who want to prevent scheduled increases for the most affluent households, too. And the parties disagree about how to prune federal spending.

The number that now divides the parties was introduced by Obama in 2007, in the early days of the presidential campaign, when he promised to extend the Bush tax cuts for families that made less than that amount. "I can make a firm pledge," Obama said in September 2008. "Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes."

When policymakers talk about income, however, they don't mean the amount of money a family earns; they mean the portion subject to taxes. The government does not tax contributions to retirement plans, interest payments on mortgages or charitable donations, among other things. As a result, two families with the same incomes will most likely have different taxable incomes.

To guarantee that tax rates do not increase for any family making less than $250,000, the Obama administration proposed in 2009 to raise marginal rates on taxable income above about $230,000 -- because the minimum amount of income a family is entitled to shelter from taxation is roughly $20,000.

But the average amount families in that income range are entitled to shelter from taxation is much larger, closer to $60,000. In other words, families with taxable income of $230,000 on average earned about $290,000 in 2009.

Adjusted for inflation

Furthermore, to remain consistent with the president's promise, the administration has adjusted the original numbers for inflation. When Obama says $250,000, the White House says he means "in 2009 dollars." It is now proposing to raise marginal rates on families with taxable incomes above $246,000 -- meaning, on average, families earning more than about $305,000.

While the president has said that he wants to raise tax rates for the top 2 percent, only about 1 percent of taxpayers will face higher marginal rates, said an analysis by the Tax Policy Center, a research group.

The restoration of the other provisions temporarily suspended by the Bush tax cuts, including limits on deductions and higher taxes on investment income, still would raise taxes for only about 32 percent of families with income between $250,000 and $300,000, said an analysis by Citizens for Tax Justice. About 77 percent of families with income of $300,000 to $350,000 would face an increase.

Most affluent households still will pay higher taxes next year for other reasons. A two-year-old payroll tax break is set to lapse at year's end. That would increase Social Security taxes by 2 percentage points on wage income below $113,700. And the Affordable Care Act levies new taxes specifically targeting married couples earning more than $250,000 and singles earning more than $200,000 in adjusted gross income.

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