The Wall Street Journal reports that President Obama’s tax plan will kick in at $235,000 of taxable income rather than the $250,000 he promised during the 2008 campaign:
The Treasury Department’s detailed description, known as the “green book,” showed that the new 36% rate would apply to income of $250,000 “less the standard deduction and two personal exemptions.” Those items effectively represent the minimum that a couple could subtract from adjusted gross income, officials said. A senior administration official estimated that would be about $235,000.
The current rate for taxpayers in that income level is 33%, which now applies to income starting at about $209,000.
The current highest tax rate is 35%. That would rise to 39.6% under the Obama proposal. That bracket currently starts at about $373,000. The exact income level for that bracket in the 2011 tax year hasn’t been determined yet.
By raising the top rate from 35% to 39.6% President Obama is proposing a tax rate increase of 14% (4.6%/33%=14%).
Let’s run some figures and see what we’re talking about in real dollars.
Example
Eileen Levy and her husband Max have $425,000 of taxable income in 2011.
Here’s their federal tax liability under current law and what it would be under President Obama’s law.
Tax under current (2008) law is $120,325
Eileen’s and Max’s tax liability under current law would be $120,325 calculated using the tax rate schedules as follows:
$96,770 + ((425,000 – 357,700) x 35%)
Tax under President Obama’s Law is $126,551
Tax on the first $235,000 = 44,828 + (33% x (235,000-200,300) = $56,279 (using current tax rate schedules)
Tax on Excess over $235,000 (373,000 – 235,000) = 36% x 138,000 = $49,680
Tax on Excess over $373,000 (425,000 – 373,000) = 39.6% x 52,000 = $20,592
Total Tax = $126,551
Conclusion
Eileen and Max will have to pay about $6,200 more in tax in 2011 as a result of the Obama tax increases – not an earth-shattering increase, to be sure.
But watch what happens for people making really big money.
Tax Increases on the Very Rich
For a business executive that makes, say, $2,000,000 in 2011, the difference is more dramatic because under Obama’s plan every dollar earned over $373,000 is subject to an additional 4.6% (39.6% – 35.0%) in taxes. At the top bracket alone the executive would have to pay an additional $75k in taxes calculated as follows:
(2,000,000 – 373,000) x 4.6%
And the super-rich really take it on the chin.
For instance, elite athletes like Lebron James, Peyton Manning and Alex Rodriguez who earn well over $15 million a year will have to pay more than a half million dollars in additional taxes under Obama’s plan.
You can do your own math for the mega-rich.
16 responses so far ↓
1 Leftfield // May 12, 2009 at 1:02 pm
Are these increases all the result of the automatic expiration of the tax cuts passed under George W. Bush, or is Obama actually proposing some legislation?
If this is just a return to the tax rates in force during the Clinton administration, it doesn’t seem likely to hurt the economy too much.
2 Peter // May 12, 2009 at 5:28 pm
Leftfield,
These are new tax increases.
I think these rates are similar to what were in place during the Clinton years.
As far as the tax increases hurting the economy, there are studies that show that increasing taxes on the rich chills their spending on luxury items, which in turn can cause certain industries to contract.
After all, someone has to buy the Yachts, the Lear Jets and the Skybox Seats.
I guess the dispute comes down to the age-old question: Who would you rather have spending your money, the government or the private sector?
3 Bob Smith // May 12, 2009 at 5:55 pm
What about reinstating the phaseout of personal exemptions and deductions, and limiting deductions to a 28% effective rate? That’s quite a few more dollars out of the pockets of Eileen and Max. Don’t get me started on instituting self-employment tax on carried interests.
4 Peter // May 13, 2009 at 7:46 am
Bob,
I tried to make the calculations as simple as possible, but you are exactly right.
There are phaseouts and other provisions that make the tax increases even larger.
5 Alison // May 13, 2009 at 10:07 am
Whew. I don’t have a thing to worry about. (Is that a good thing or a bad thing??)
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10 James C. Ronning // Jul 24, 2010 at 5:31 pm
Just curious if anyone has some comments on this. Is is right for a person who doesn’t steal, doesn’t cheat, works hard, and achieves what we once called the American Dream. Let’s suppose that these people are continued to be look on as crooks or even worse by the lower classes or in many cases the middle class (which incidently is disappearing and it was their rise that kept Marx’s prediction of a revolution that would spark Communism all over the world). Now I know of some people who just wanted more freedon out of life. Money can enslave some people, but it has been my experience that those that I know that make a lot of money (sometimes called the mega-rich) have a happier and more fulfilling life then those that are poor. It can bring freedom. The traditional middle class in America can afford just about anything that the mega-rich can except a smaller house, less exotic car, less exotic travel, etc. But studies report that these people in general are more happy then the poor. In fact a dentist or a manager of a small business, or an engineer that has a house in a gated community, drives a Mercedes/Lexus (maybe one of the less expensive ones) belongs to a private golfing country club (Maybe not Augusta), etc. are more apt to approve of the accomplishments of the rich. After all, it is the rich that did not just inherit it, that are providing the very jobs that have given most of them this wonderful life. Now look beyond your noses. Of course everyone knows exceptions ! There are mega rich, and just rich that are miserable. But it is not because of their money. It is what they do with it and what they had to do to get it. It is almost impossible to be super rich in America with out at some point doing a lot of underhanded stuff, lying, cheating, etc. and many can’t handle the guilt that goes with it as the go about ignoring those who are suffering or in need both in America and let’s say Haiti. I have bumped in to a few of these very rich people and had conversations that left me with the impression that it is GREED more then having money that causes all their drug taking, alcoholism, and lack of basic morality. A recent study that I had the privilage of being bit player in found that contrary to the belief that money makes for misery that in fact a greater majority of the wealthy report being happier then the poor or even our deterioating middle classes ( which something needs to be done about it.). That old person saying he is glad he does not have more money is like the fable of the Fox and the Grapes. That old Fox really wanted those ripe juicy grapes, but he lacked the effort, ability, etc. . So when he couldn’t figure out how to get one or didn’t try long enough, or accept failure and keep trying he just quit and walked on down the road saying “Well, they were probably sour anyway”. In psychology this is called rationalization for our failures. But Freud came along and said that most of these ego defense mechanisms are subconscious (hidden deep within our subconscience) As usual I talk too much, but essentially that is what a writer has to do to get his work published. Any reaction ?
11 Peter // Jul 25, 2010 at 11:55 am
James,
I don’t think you talk too much, but rather that you never heard of the paragraph. Break up that large chunk of type and it’s a heckuva lot easier to read.
By the way, the notion that money, wealth and fame automatically make one happy was refuted long ago by Edward Arlington Robinson in his poem Richard Cory:
Whenever Richard Cory went down town,
We people on the pavement looked at him;
He was a gentleman from sole to crown,
Clean favored, and imperially slim.
And he was always quietly arrayed,
And he was always human when he talked;
But still he fluttered pulses when he said,
“Good-morning,” and he glittered when he walked.
And he was rich—yes, richer than a king—
And admirably schooled in every grace:
In fine, we thought that he was everything
To make us wish that we were in his place.
So on we worked, and waited for the light,
And went without the meat, and cursed the bread;
And Richard Cory, one calm summer night,
Went home and put a bullet through his head.
12 James C. Ronning // Jul 29, 2010 at 1:36 am
Robinson was a poet not a scientist.
13 Peter // Jul 29, 2010 at 9:36 am
James,
There is much wisdom in poetry, my friend.
Just about everything Freud wrote about the human condition was dramatized 300 years before by Shakespeare.
14 James C. Ronning // Aug 2, 2010 at 3:32 am
Peter, I am not going to let you dictate to me how to right my comments. And your last comment is quite stupid. I have two Ph.Ds in neuropsycology and clinical psychology and a MPH from Johns Hopkins in medical psychology and am a PA who can practice medicene supposedly under the supervision of an MD. Have you been to an MD lately. Chances are good that you were treated by a PA. I do minor surgery and due to my Ph.D in Neuro. Psy. have helped with major neruo- surgery. Now if you needed something cut out would you rather go to an MD or a PA or to a poet. But incidently I am a novelest, song writer (some major hits by major artists like Neil Diamond, Willie Nelson, Melissa Manchester, and others. I am also a poet so I guess I got a lot of wisdom there also. But I also spent the last part of my career as CEO of Psychometrics of North America. I am a multi-millionaire who also knows the business world. Now if you want to talk to me about philosophy (got a BS in that sir). Google my name before you bable. You may find also that the High IQ societies have just labeled me as the smartest man in the world based on IQ scores and my name will be printed in the next edition of that book of records. Now I don’t accept that claim, I think Mensa and such or nuts, but just wanted you to know who you are talking to. Also proud to fly an F-4 Phantom off the deck of the USS Constalation. You name something like crossing oceans, living in other countries, climbing Mtns, having contact with brilliant minds, etc. and you would be talking about me sir. But like Sir Francis Bacon’s story of all the philosophers, men of letters, probably POETS, were trying to use this wisdom you speak of to try and discover how many teeth were in the mouth of a horse. You know these Poets and such have lots of wisdom, but it took a future Scientist to raise his hand and tell them if they wanted to know the TRUTH about their question “why don’t you go out and count them”. Thus one part of the scientific method was born. Obsevation and measurement later called the deductive-inductive process. And you can’t use Freud to describe what is now modern psychology. Now you show me where Shakespeare “dramatized 300 years before Freud in any way that could be associated with a pragmatic approach to helping people, especially the conversion reactions that Freud was dealing with. This age of sexual repression caused so many of the “mental problems of women” that Freud incorrectly concluded (like the poet thinking pure reasoning can generate the truths of the universe and the human body) that sexual problems was at the root of All mental disorders. And Peter, my God sir, a writer writing about people and events and emotions, etc. is bound to touch the surface and some a little deeper of the human condition. Are you that dumb or just stupid ?
15 James C. Ronning // Aug 2, 2010 at 3:40 am
I left out one important think dear Peter. Go back and read my first letter and show me where I said that having money could “automatically” make a person more happy. For every 10 to 50 rules there is an exception just calculating in my head from the statistics of the 1% who have the money that pays 52% of your taxes. Now I had better things to do then this, but I hate to see a man make a fool out of himself like you did. You must be a Lawyer.
16 Peter // Aug 2, 2010 at 8:54 am
James,
Neil Diamond? LOL.
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