Should the Rich Pay Higher Taxes?

Editor’s Note: This story was originally posted in 2010 prior to the compromise that left tax rates unchanged for all Americans in all tax brackets. In July 2011, thanks to the debate over raising the debt ceiling, the issue is back on the front burner. So here’s a look at what raising the taxes of the wealthiest Americans will mean.)

Paying taxes is perplexing enough. Trying to figure out what Congress will do about the Bush tax cuts is downright confusing. Here’s the history in exactly 60 words…

President Bush’s Jobs and Growth Tax Relief Reconciliation Act cut all sorts of taxes – individual, estate, capital gains, and dividends – in 2001 and 2003. But to get Congressional support, Bush set the cuts to expire in 2010 unless Congress extended them. Liberals hated the idea, conservatives loved it, and ever since, experts have debated whether Bush’s cuts have hurt or helped the economy.

So this is where things stand: If Congress does nothing, the tax cuts fade away and the tax rate returns to 2000 levels. But almost no one thinks Congress will do nothing. The debate is whether to keep all the cuts (Republicans) or eliminate just those just on the rich (most, but not all, Democrats). “Rich” in this case means an adjusted gross income of more than $250,000 a year for married couples filing a joint return or singles reporting more than $200,000. If the politicians plan to lean on the polls, they’ll be confused…

• A Rasmussen Reports national telephone survey at the beginning of August showed 48 percent of Americans want to keep the tax cuts even for the rich – but 40 percent don’t.
• A CNBC poll last week revealed “40 percent said tax cuts should be canceled for higher-income taxpayers.”
• A Pew Research Center Pew Research/National Journal Congressional Connection in mid-September declared an even split, with 29 percent supporting extending the tax cuts for all and roughly the same amount (28 percent) saying not for the wealthy – and with 28 percent saying let all the tax cuts expire for everyone.

But here’s the fascinating part most folks don’t know: If President Obama succeeds in rolling back the tax breaks for the wealthy, some well-off Americans will actually pay less.

Those in the top two brackets will certainly pay more if Congress lets their cuts expire, but some near the bottom edge of the new 36-percent tax bracket will receive a small windfall. Here’s why: Someone on the edge of that bracket will have only a small part of their income would be taxed at 36 percent. But most of their income will be taxed at broader lower brackets. The result? A tax reduction.

As CNN pointed out, “Take someone with a taxable income of $210,000. Last year, they owed $54,000 in taxes (assuming one personal exemption and a basic standard deduction), but they would owe $53,512 under the new tax bracket, amounting to a $488 tax reduction.”

Of course, if you make more than $250,000, you could owe much more, from a few hundreds dollars to many thousands…

Say you’re a single filer with a taxable income of $250,000. This year, you owed $67,617 in income tax under the 33-percent bracket. Under the new system, you would pay $67,912 in taxes next year, a slight increase of $295. But those people making more than $300,000 are going to owe additional amounts in the thousands. For instance, if you make $382,650 you’ll owe an extra $4,095 in income tax. Single filers with $500,000 in taxable income would owe Uncle Sam an additional $9,492 from this year’s tax bill. Meanwhile, joint filers with taxable income of $700,000 would owe $232,396 in 2011, an extra $17,088 from $215,308 in 2010.

Late last week, Senate Democrats postponed the debate until at least November 15, the date Congress resumes after the November elections.

No matter how it turns out, the President will win – if taxes for big earners goes up, he scores a political victory. But if the Bush tax cuts remain in place, he scores a financial victory. Because President Obama filed jointly with his wife Michelle and earned almost $5 million last year, without the Bush tax cuts in place, his tax bill could jump $200,000 in 2011.