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tax topics
Who would be affected compared to a full extension?

1. Whom would the president’s tax proposals affect?

President Obama’s proposals would affect only married couples with income greater than $250,000 and single individuals with income greater than $200,000.* Three changes would raise taxes on those two groups:

  • Raise the top two tax rates from 33 percent and 35 percent to 36 percent and 39.6 percent
  • Restore the limitation on itemized deductions (Pease) and the phaseout of personal exemptions (PEP)
  • Raise the top tax rate on long-term capital gains and qualified dividends from 15 percent to 20%

*Note: The $250,000 and $200,000 income amounts refer to values in 2009 dollars. Using current estimates for the consumer price index, TPC estimates that indexation would raise those values to $254,450 and $203,550 for 2011. This discussion uses the $250,000/$200,000 values as shorthand for the actual indexed values.

2. What would happen to the alternative minimum tax (AMT)?

President Obama’s proposal would permanently increase AMT exemptions at their 2009 levels, index them for subsequent inflation, and allow all personal nonrefundable credits, regardless of tentative AMT. TPC’s analysis assumes that the same provisions would apply to a complete extension of the Bush tax cuts.

3. How many households have income greater than those thresholds? How many of them are married couples with income greater than $250,000? How many of them are single individuals with income greater than $200,000?

In 2011, TPC estimates that 3.5 million households would have adjusted gross income (AGI) greater than the Obama thresholds. Of those, 2.9 million would be married couples with AGI greater than $250,000 and 0.6 million would be single individuals with AGI greater than $200,000. (related table)

4. Compared with extending all the Bush tax cuts, would everyone with AGI above those thresholds pay higher taxes under President Obama’s proposal?

No, for two reasons:

  1. Some taxpayers who are on the alternative minimum tax (AMT), a parallel income tax system, would not be affected by any of the President’s proposals to limit the tax savings for high-income individuals.Thus they would pay the same amount under both full extension and the Obama plan.

  2. The Obama proposal would return the current 33 percent tax rate to 36 percent and also raise the taxable income threshold at which that rate begins to apply.That higher threshold would mean that some income previously taxed at 33 percent would be taxed at 28 percent. The consequent tax savings would offset tax increases that result from other provisions the president proposes.

5. So how many households would actually pay higher taxes under President Obama’s proposal, compared with extending all the tax cuts?

TPC estimates that in 2011, 2.7 million households—about 1.7 percent of all households—would pay more under the Obama proposal than under full extension of the 2001-2003 tax cuts. (related table)

6. Who are these people who would pay higher taxes under the President’s proposal?

TPC estimates that 2.2 million married couples and 0.5 million single individuals would pay higher taxes. Those households would have average total cash income of $917,000. Half of these households would have income greater than $482,000; one-quarter would have income greater than $781,000. On average, they would receive 37 percent of their income from wages and salaries, 17 percent from business-related enterprises (sole proprietorships, partnerships, S corporations, and other businesses), and 23 percent from capital income such as dividends, interest, and capital gains from the sale of assets. (related table)

Note: These income values measure cash income. See a discussion here.

7. Would the president’s proposal take away all of the 2001-2003 tax cuts from the 2.7 million households that would pay more tax in 2011?

No. President Obama’s plan would extend all but four of the Bush tax cut provisions. Many of the extended provisions—particularly the lower tax rates—reduce taxes not only for lower income households but also for high-income households. On average, the high-income households hit by Obama’s plan would still receive more than $12,000 of their Bush tax cuts. In dollar terms, that’s more than any other income class.

8. How much do the households that would face higher taxes under the Obama proposal already pay in federal taxes?

If all of the Bush tax cuts expire as scheduled, these households would pay an average of 32.9 percent of their income in total federal taxes in 2011. Under President Obama’s proposal, these households would pay an average of 31.5 percent. If Congress extends all the tax cuts, these households would pay an average tax rate of 29.2 percent.

Note: These tax rates include individual and corporate income taxes, payroll taxes for Social Security and Medicare, and the estate tax. The average tax rate equals the sum of those taxes divided by cash income.

9. How much less tax revenue would the federal government collect under the two alternatives to allowing the 2001-2003 tax cuts to expire at the end of 2010 as scheduled?

According to Treasury Department estimates,

  1. Extending all of the Bush tax cuts would reduce federal tax revenue by approximately $3.7 trillion over the 2011-2020 period

  2. President Obama’s proposals to limit the tax savings for high-income people would reduce revenue by approximately $3 trillion over the decade