The Corner

Back to Clinton Rates?

For those soothed by the thought that “all” we are a looking at is a return to Clinton-era tax rates here is a useful reminder of the rather rougher reality from Alan Viard:

In the debate over the looming fiscal cliff, U.S. President Barack Obama often plays down any adverse economic impact from letting the 2001 and 2003 tax cuts expire for high-income Americans, claiming that the top tax rates would merely return to where they were during the Clinton years. Unfortunately, the president’s claim is incorrect because he ignores the impending arrival of the unearned income Medicare contribution tax, which will further raise tax rates on income from saving.

Scheduled to take effect on Jan. 1, the tax, which was adopted as part of the 2010 health-care law, is a 3.8 percent levy on interest, dividends, capital gains and passive business income received by taxpayers with incomes exceeding $200,000 (or $250,000 for couples).

Because the new tax was added to the health-care law late in the process without congressional hearings, it received little attention at the time. With only a few weeks left before it takes effect, it remains largely unknown.

Ah yes. Another tax on savings: just what this heavily indebted nation needs.

“No congressional hearings”? Icing on the cake.

Reasonably enough, Viard is also vexed by the idea that this income is described as “unearned”, a mildly insulting term.

It’s cold comfort, but that, at least, has changed. Viard notes:

The IRS is now calling it the “net investment income tax.”

But he adds that he prefers the term “tax on income earned by savers”. Resisting the obvious joke that it would be simpler just to call it robbery, I’d add one word to Viard’s formulation: “nominal”, so that this new levy is described as a “tax on nominal income earned by savers”.

Why the “nominal”? Well, with inflation (calculated most kindly) running at a little over 2per cent, those receiving, say, the crumbs of interest now available in most banks, are in fact earning themselves a negative real return. Their income is an illusion. The tax is not.

Then again this is exactly the sort of inequity that will result when you combine big-spending government with a tax system that so disproportionately targets income.

And on that depressing note, I’ll go and re-read this (and follow the links too). It’s well worth doing so.

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