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111 IRET Byline 1 (1993)

handle is hein.taxfoundation/iretbyln0111 and id is 1 raw text is: April 12, 1993 No. 111 How Clinton's Tax Rate Increases on Rich Individuals Will Hurt Everyone President Clinton has proposed a series of explicit and implicit marginal tax rate increases on upper income taxpayers. The rate hikes would seriously reduce incentives to work, save, and invest among the affected people. GDP, employment, and productivity would fall. Tax avoidance would increase. Taxable income would decline. Revenue from the rate hikes would fall far short of expectations. Clinton's explicit marginal tax rate increases would take the form of a new top tax rate of 36% on taxable incomes above $140,000 for married couples filing jointly and on single filers with taxable incomes over $115,000. A 10% surtax would hit those with taxable income over $250,000. The basic Alternative Minimum Tax (AMT) rate would be increased, and a second AMT bracket at a higher rate would be added on AMT income over $175,000. The hidden marginal tax rate hikes that Clinton proposes are to extend the present law's phase-outs of personal exemptions (PE) and up to 80% of itemized deductions (ID) for upper income taxpayers. PEs are phased out over adjusted gross incomes (AGI) of $108,450 - $230,950 for single individuals and $162,700 - $285,200 for married people filing jointly. IDs are gradually lost on AGIs above $108,450 for all filers, without upper limit. The phase-outs were scheduled to expire in 1996 (ID) and 1997 (PE). Institute for Research on the Economics of Taxation IRETv Bylin These phase-outs were enacted as part of the 1990 budget deal to raise revenue from the upper income while saving face for President Bush, who had promised not to raise marginal income tax rates. Because of the phase-outs, however, an additional dollar of income raises taxable income by more than a dollar, effectively raising the marginal rates. For example, in 1993, a married couple in the 31% bracket, with two children, losing IDs and PEs faces an effective 34.3% marginal income tax rate. Under the proposed 36% tax rate, the phase-outs would boost the effective marginal tax rate to 39.8%. (The increase would become steeper over time as the PEs increase with inflation, because the phase-out ranges are not indexed.) Taxpayers affected by the ID phase- out and the proposed 10% surtax would face a marginal tax rate of 40.8%. (See table. Details are available upon request.) These proposed tax rates are far higher than the 31% rate that would apply under current law after expiration of the phase-outs. Clinton also proposes to eliminate the current $135,000 wage cap on the 2.9% Medicare (HI, hospital insurance) portion of the payroll tax, which would then cover all wage and salary income. Because half of the HI tax is deductible against the income tax by the employer or the self-employed taxpayer, the net increase in the marginal tax rate on labor income over $135,000 would be 2.3 to 2.6 percentage points. High-salaried employees with a family of 4 could face a combined marginal federal income and HI tax rate of nearly 37% to more than 43%. (See table.) Even higher marginal rates might apply at lower levels of wage and salary income under the proposals. Taxpayers with labor income below the cap for the retirement and disability portions of the payroll tax might face combined marginal federal income and payroll tax rates of up to 53%. This could occur if other income, from savings or earnings of a working spouse, pushed total taxable income and AGI to levels affected by the income tax hikes. IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1331 Pennsylvania Ave., N.W., Suite 515, Washington, D.C. 20004 Phone: (202) 347-9570

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