Domestic Taxes

Tax day socks wealthy

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The richest taxpayers will find their wallets hundreds of thousands of dollars lighter this Tax Day.

With federal returns due Tuesday, the Urban-Brookings Tax Policy Center says that a deal struck just months after President Obama’s reelection will force the top 0.1 percent – those making more than roughly $2.6 million a year – to pay an average of around $232,000 more in taxes for 2013.

All of the George W. Bush-era tax rates were set to expire at the end of 2012, and in exchange for the extension of most of those rates, Republicans agreed to raise rates on the wealthiest households.

The deal raised the individual income tax rates on the highest earners from 35 percent to 39.6 percent.

On top of that, high earners also face a hike on capital gains income, and reduced access to personal exemptions and deductions.

Plus, workers with the highest paychecks also face a separate tax hike on investment income and other new levies from Obama’s healthcare law.

The highest 1 percent of earners, generally those making north of $500,000 a year, will see a tax hike of some $38,000 a year because of the fiscal-cliff deal, the Tax Policy Center found. 

The ObamaCare taxes will add an average of $20,000 more to the tax bills of the top 1 percent, while the top 0.1 percent will pay an extra $118,000, according to the tax center.

In fact, Obama’s own tax rate even rose this year because of his policies, and he wasn’t even hit by the newly created top individual bracket.

The tax increases from the fiscal-cliff deal and the Affordable Care Act basically “hit high-income people and only hit high-income people,” said the Tax Policy Center’s Roberton Williams.

“For most people, taxes are going to look an awful lot like last year. It won’t be very different. The only people who will see a marked change will be those people at the top.”

The added revenues from those higher taxes, the Congressional Budget Office says, also helped eat into deficits.

What’s more debatable is how much of a drag those tax hikes had on the economy.

Mark Zandi of Moody’s Analytics has projected that the higher rates on the top earners pared back economic growth by 0.2 percentage points last year.

But Zandi said a bigger drain on the economy was the lapse in 2013 of a payroll tax cut that helped a broad section of U.S. workers. The end of that tax break cost the economy 0.6 percentage points last year, Zandi said.

“We didn’t expect much effect, and don’t have any reason to believe there was much effect,” Chuck Marr of the liberal Center on Budget and Policy Priorities said of the income tax rate increases.

Douglas Holtz-Eakin of the conservative American Action Forum, however, said the tax increases “can’t have helped” and were especially painful for small businesses.

“It’s just not plausible to me to take a economy struggling along, and see it improve with those tax increases,” said Holtz-Eakin, also a former director of the Congressional Budget Office (CBO).

The string of new taxes did force the top earners to supply a higher percentage of the country’s revenue.

All taxpayers faced an average tax increase of 1.8 percent under the fiscal-cliff deal, in part because of the broad impact of the payroll tax cut disappearing.

But the top 1 percent’s taxes went up an average of 4.5 percent, and the top 0.1 percent absorbed a 5.6 percent tax hike.

On Monday, the CBO projected that revenues would increase 9 percent from 2013 to 2014, and then another 9 percent the following year in large part because of the fiscal-cliff deal. That projection also assumes that dozens of expired temporary tax breaks won’t be revived, an unlikely outcome.

The question over whether the wealthy should pay more in taxes hasn’t been quite the front-burner issue in the 2014 elections that it was two years ago, when Obama explicitly campaigned on the issue and succeeded in casting his GOP opponent, Mitt Romney, as the epitome of the 1 percent.

But with Democrats continuing to push a populist economic message, the issue could easily come back to the forefront again.

Marr, for instance, suggested that the tax code could be made more progressive, noting the vast rise in income inequality over the last 35 years.

“There’s been a massive shift in income, and there’s no sign that that’s going to subside. The wealth numbers are all pointing toward increasing income inequality,” said Marr, a onetime adviser to former President Clinton. “In that context, you’d like the tax code to lean against that somewhat.”

Republicans have started to recognize the potency of that message.

House Ways and Means Chairman Dave Camp (R-Mich.) went out of his way to avoid giving a tax cut to the wealthy in his recent broad tax reform draft. GOP tax writers acknowledged the criticism Romney faced for his tax plan influenced that decision.

But Holtz-Eakin said that populist pitch was leading to bad economics.

“I think we know that this is an extremely populist era, and that the wealthy are very unpopular,” Holtz-Eakin said. “I understand that, but that doesn’t mean these tax increases were a good idea.”

Still, the Tax Policy Center’s Williams said he didn’t expect that top earners will get much sympathy from their fellow taxpayers.

“I think 98 percent of the population will be happy to switch places with those people,” he said.

Tags Barack Obama Fiscal cliff Income taxes tax day tax hikes
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