Wealthy Face Slightly Higher Levies : Taxes: Under the new rules, middle-income earners will be hurt by a drastic increase in payroll taxes to pay for Medicare.
The tax changes included in the new budget package should increase the progressivity of the federal tax system--but only very slightly--economists and tax analysts said Friday.
While the wealthy will bear a somewhat larger share of the tax burden at the federal level if the new package passes, the tax system will still remain less progressive than it was prior to the 1980s, when the affluent received large tax cuts from the Reagan Administration.
“It seems a little more progressive, but not much,” said Alan Blinder, an economist at Princeton University. “People making over $100,000 will get hit more, but it is only a little bit.”
Still, the Democratic goal of increasing the progressivity of the tax code--getting the wealthy to pay proportionately more while the poor and middle-class pay relatively less--is a prime feature of the new tax package, analysts say.
The proposed tax structure should provide an actual tax cut for those with incomes of less than $20,000 a year, while increasing taxes by about 6.5% for those making $150,000 or more annually, according to Steve Bell, director of the Washington office of Salomon Bros. and a former staff director of the Senate Budget Committee.
“They are making the system mildly more progressive, raising rates on the wealthy and offsetting that for the working poor,” observed a staff member at the congressional Joint Committee on Taxation.
Still, the middle-income and upper-middle-income taxpayers will be hurt as well because of a drastic increase in the payroll taxes they will have to pay for Medicare, analysts said.
That part of the payroll tax will be increased for those earning more than $51,000 a year under the proposed plan.
For someone earning $125,000 annually, the Medicare payroll tax will increase by a total of $1,050 a year, a figure that would rise gradually for those earning between $51,000 and $125,000.
“There are some losers, and people paying that extra payroll tax are losers here,” noted the staffer on the Joint Committee.
In addition, an increase in the excise taxes on gasoline, tobacco and alcohol are all likely to hit middle- and lower-income taxpayers harder than they will the wealthy.
“The progressivity is there, but it is no big deal,” because of the excise taxes and the increased costs for upper-middle-income taxpayers from the Medicare payroll tax, noted Clint Stretch, a tax analyst at Deloitte & Touche in Washington.
Other analysts noted that middle-income taxpayers had to be the targets of tax increases in order for the government to generate enough new revenues to curb the deficit.
While imposing higher taxes on the wealthy has become a more politically charged issue in the current debate, the higher payroll tax for Medicare may in the end represent the biggest hit for most taxpayers.
“You can’t pay for many Stealth bombers just by taxing the rich, because there aren’t that many of them,” said Cynthia Latta, an economist at DRI-McGraw Hill, an economic forecasting firm based in Lexington, Mass.
“If you want to raise revenues, you have got to hit the middle class. And the Medicare tax takes a bit out of the middle class.”
While the new structure does force the wealthy to pay more, it still comes with at least a few minor inequities, according to an analysis by Stretch.
For instance, an individual earning $75,000 a year will pay $85 a year more in taxes under the new system than under the old structure, but a similar individual making $100,000 would pay only $35 a year more.
That problem is erased at the $150,000 income level for individuals, where the new system calls for $709 more in taxes than under the old code.
Those problems show up only for single people, however; for married couples with two children, the new tax code will have a much smaller impact.
Stretch estimates that married couples with two children and filing jointly will not see any net increase in their taxes if they make less than $150,000 annually.
According to his estimates, those making $150,000 will pay an extra $393 in net taxes, representing a 1.26% increase. Meanwhile, those earning $200,000 a year will see a 4.08% increase, equaling $1,825 per year.
The truly rich--those earning $1 million or more each year--will get hit with a 12.94% increase, or a total of $30,091 in extra tax payments.
Still, the tax code will remain far less burdensome for the wealthy than it was as recently as the 1970s, when the top tax rate for earned income was 50%, while the maximum rate for unearned income was as high as 70%.
And, even with the new excise taxes on luxury items, economists don’t believe the changes will have any major impact on the spending patterns of the wealthy.
“This is not going to do much about the inequality of incomes in this country,” said Charles Schultze, an economist at the Brookings Institution in Washington.
