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2010 Budget Tax Proposal

Tax Increases on High-Income Taxpayers

Under current law, the 2001 and 2003 tax cuts nearly all expire in 2011, returning the individual income tax to its pre-2001 level (except for a few permanent changes). In defining the baseline for his budget, the president assumes that, rather than ending in 2011, the tax cuts will become permanent. From that baseline, he would increase taxes in 2011 for high-income taxpayers—couples with income over $250,000 and single people with income above $200,000. 

Specifically, he would raise the top two tax rates back to their pre-2001 levels, change the income threshold for the next-to-highest rate, reinstate the personal exemption phaseout and the limitation on itemized deductions, and impose a 20 percent tax rate on long-term capital gains and qualified dividends.

Those tax increases would essentially leave income tax rates for high-income taxpayers at the levels scheduled after 2010 under current law although the incomes defining the next to highest tax rate would change. People with qualified dividend income would pay less tax because the proposed 20 percent rate would be lower than their regular tax rate, the rate that would apply to dividend income if Congress let the 2001-2003 tax cuts expire. Others would pay more tax because the 20 percent rate on capital gains exceeds the 18 percent rate that would apply to gains on assets held more than five years and because the phaseout of personal exemptions would begin at a lower income than under current law.

Relative to current law, under which the 2001-2003 tax cuts would virtually all expire after 2010, these proposals would increase income taxes for about 5 percent of all taxpayers with most of the increase toward the upper end of the income distribution. About one-sixth of those in the top quintile and one-fourth of those in the top 1 percent would experience a tax increase.

Distribution tables
       Tax increases on high-income taxpayers
2012 versus current law by cash income
2012 versus current law by cash income percentile
2012 versus Administration baseline by cash income
2012 versus Administration baseline by cash income percentile

  • Reinstate 39.6 percent rate in 2011

The president proposes to raise the top tax rate in 2011 from 35 percent to 39.6 percent.

  • Increase the 33 percent tax rate to 36 percent and change the thresholds for that tax bracket in 2011.

The president proposes to return the 33 percent tax rate to its pre-2001 level of 36 percent and change the lower bound for taxable income subject to that rate. For married couples filing jointly, the 36 percent bracket would begin when taxable income exceeds $250,000 minus the sum of the standard deduction for couples plus twice the personal exemption.1 For single filers, the threshold would start at $200,000 minus the sum of the standard deduction for single filers plus the person exemption.2 

Increasing the threshold would reduce the current 33 percent tax rate on income between the old and new thresholds to 28 percent, reducing the tax liability of people with taxable income in that range. That tax reduction would also offset some or all of the tax increase for people with taxable income above the new thresholds. 

For example, the Tax Policy Center projects that the 2011 threshold for the next to the highest tax bracket for married couples filing jointly will be $210,400 under the budget's extended baseline but would increase to $232,950 under the president's proposal (see tax rate table). People with taxable income between the two thresholds would see their tax rate on that income fall from 33 percent to 28 percent under the proposal, reducing their regular tax liability by up to $1,128. 

Everyone with taxable income at or above the new threshold who does not pay the alternative minimum tax (AMT) would get the maximum tax cut on income in that range.3 Those with taxable income above the new threshold would incur a tax increase on that portion of their income above the threshold because the top two tax rates would increase. 

The tax savings from the wider 28 percent bracket would fully compensate for the rate increases for couples with taxable income up to $270,533 and single filers with income up to $224,000, giving those taxpayers a net tax cut.4 People with income above those levels would see their tax liability rise.

2011-Tax-Rates

That situation would reverse for heads of household, for whom the threshold for the new 36 percent tax bracket would fall rather that rise (assuming the threshold is set in a manner similar to that for singles and married couples filing jointly).5 Heads of households with taxable income between $189,350 and $191,600 would see the tax rate on income in that range rise from 28 percent to 36 percent, boosting their tax bill by up to $180. Every head household with taxable income above $191,600 would experience that $180 tax increase in addition to the additional tax due to raising the current 33 and 35 percent rates to 36 and 39.6 percent, respectively.

Footnotes
1.The Treasury Department description of this proposal does not say at what income the 36 percent bracket would begin for married couples filing separately. In keeping with other provisions in the individual income tax, however, that threshold would be half of the threshold for married couples filing jointly.
2.A similar calculation would presumably apply in setting the tax bracket’s threshold for heads of household—that is, the threshold would equal $200,000 minus the standard deduction for heads of household and one personal exemption. The Treasury Department’s description of the proposal says only that the threshold applies "for single filers." Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals, May 2009, p. 74. See further discussion below.
3.Taxpayers who owe AMT would not get a tax cut under the proposal since their tax liability is determined by the AMT, not their regular tax liability. A significant number of taxpayers with income in the affected ranges, particularly married couples, are on the AMT.
4.The widening of the 28 percent bracket would cut the tax rate for married couples filing jointly from 33 percent to 28 percent on up to $22,550 of taxable income, yielding a maximum tax saving of $1,127.50. The increase in the tax rate on additional income from the 33 percent to 36 percent would raise tax liability by an equivalent amount when income equals $270,533. (The increase is 3 percent of taxable income over $232,950 = .03 times $37,583 = $1,127.50.)
5.TPC assumes that the 2009 threshold for the proposed 36 percent tax bracket would equal $200,000 minus the standard deduction for heads of household minus one personal exemption. The 2011 threshold would be that threshold indexed for inflation between 2009 and 2011.

Additional Resources
Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal; Part One: Individual Income Tax and Estate and Gift Tax Provisions (JCS-2-09), Joint Committee on Taxation, September 2009, pp 22-26