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Not Quite Back to the 1990s



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Among the many fuzzy statements that Obama has made about taxes none is more erroneous than his “asking folks who are making more than a quarter million dollars a year to go back to the tax rate they were paying in the 1990s before the Bush tax cuts.”

Note the nebulous phrase “tax rate” that conflates federal income taxes and FICA payroll taxes on income. As I recall, the Clintons never  introduced legislation repealing the caps on payroll/Social Security taxes. Obama has; and so the new exposure to the 12.4% on self-employed income, coupled with the 2.9% contribution for Medicare, would mean that on self-employed income (and that would be the more likely target), we are talking about a 15.3% tax hike, added onto a 5% additional tax raise on income (34% to 39%).

One can support or reject Obama’s plans, but he should at least admit he is not at all going back to the 1990s, but proposing something quite radically new: that anyone in America who makes over $250,000 (the targeted amount seems to change frequently), would pay a new additional tax of 19.3% on their income. And in some states with a 9% state income tax rate, coupled with the 2.9% Medicare rate, one can see that a total tax bite, federal, state, and FICA/Medicare, of at least about  65% of their income, aside from proposed increases in capital gains and inheritance taxes.

This is a radical effort at redistribution (in line with Obama’s earlier statement that legislative rather than court action is more effective in redistribution), and nothing at all like the 1990s. The danger is that, coupled with exempting nearly half the wage-earning population from any federal income tax liability, we are going to discourage incentives at both ends of the spectrum. Human nature being what it is, the half of American wage earners exempt will not be so eager to work additionally if it means beginning to pay federal income taxes. The “rich” 4%, who now pay 60+% of the nation’s aggregate income taxes, will not be so eager either, if it means giving 2/3s of their additional income to government(s) to give it back to those who are not paying any federal income tax.



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