Tax burden mounting for high earners

With enactment of his signature healthcare law, President Obama has also made good on another major campaign promise: to ease the tax burden on middle-class Americans and pay for his domestic agenda by raising taxes on the wealthy. And for upper-income taxpayers, the tab for healthcare is just the beginning.

Families earning more than $250,000 and individuals making more than $200,000 will not only pay new healthcare-related taxes, but also face the likely expiration of upper-income tax cuts enacted under President George W. Bush. As a result, these Americans could be tapped for about $650 billion in additional taxes over the next 10 years -- a prospect that is loaded with both political opportunity and peril.

Obama and the Democratic majority in Congress, faced with the need to pay for healthcare while also trying to rein in the deficit, see a chance to limit some of the political and economic pain by putting more of the burden on the country’s highest earners. But Republicans are already hammering Obama for leading a broad-scale redistribution of income that could threaten the economic recovery.

The healthcare overhaul calls for collecting more than $200 billion in new taxes over 10 years from upper-income taxpayers. Moreover, while Democrats plan to extend the Bush-era tax cuts for middle-income earners, they would let the income tax rates for top earners rise back to pre-Bush levels. That would raise nearly $443 billion over 10 years, by one estimate based on administration figures, which Democrats see as a pot of gold they can use to respond to the public clamor for deficit reduction.

“The people who will be paying more taxes aren’t middle- or low-income taxpayers,” said House Ways and Means Chairman Sander M. Levin (D-Mich.).

Levin contended that higher levies on the wealthy would restore balance to the tax system. “The last decade, the distribution of income and wealth heavily favored a relatively small number of people.”

A key question in this closely contested midterm election year is whether Democrats will get cold feet over raising taxes during hard economic times.

“They are in a push-pull situation,” said Roberton Williams, a tax policy analyst at the nonpartisan Tax Policy Center. “They really want the money [from raising taxes]. But they don’t want to quash the nascent recovery. How do you thread the needle?”

Already, Republicans and conservative economists are complaining that Democrats’ “spread-the-wealth” effort will make it harder for the U.S. to return to prosperity by discouraging investment and imposing new costs on business.

The healthcare law “is not pro-jobs and it will hurt our economic recovery,” said Rep. Dave Camp (R-Mich.), who has forced the House to vote on repealing some of the new tax increases.

Only 10 Democrats backed Camp’s amendment in March, but enthusiasm for raising taxes could wane as the midterm elections draw nearer.

Republicans are hoping to turn up the heat on the tax issue by emphasizing how Obama’s policies affect many people who do not consider themselves rich.

And while none of the bill’s provisions apply to the IRS forms due next week, congressional GOP leaders plan to use the income tax filing deadline as an occasion to spotlight a list of seven tax increases in the health bill that would apply to families earning less than $250,000 a year -- despite Obama’s campaign pledge not to raise taxes on them.

Compiled by Americans for Tax Reform, a conservative group, the list includes the bill’s 10% tax on use of tanning salons that kicks in July 1; a $2,500 cap -- down from the $5,000 employers typically allow -- on annual contributions to tax-free health spending accounts beginning in 2013; and a ban on using money from those accounts to pay for over-the-counter drugs.

But nearly half of the bill’s revenues -- about $210 billion over 10 years -- will be raised from Medicare tax hikes beginning in 2013 on individuals with an income of more than $200,000 and couples earning more than $250,000.

Taxpayers in that bracket also will have to pay a 3.8% surtax on capital gains and other investment income, which currently are exempt from Medicare taxes. That would increase the top tax rate on capital gains from 20% to 23.8%.

According to an analysis by the Tax Policy Center, almost 75% of the money raised from those Medicare tax changes would come from filers with more than $1 million in income, who would pay an average of $45,797 in additional taxes.

Meanwhile, Obama and Democratic leaders have promised to let the Bush-era tax cuts expire for the top two income brackets -- taxpayers earning more than $200,000 as individuals or $250,000 for couples, or about 2% of all taxpayers, according to the Tax Policy Center. The effect would be to raise the top rate on income from 35% now to its pre-Bush level of 39.6%.

Democrats’ open willingness to support such a tax increase is a political departure from past years when they have shied from being tagged as tax-and-spend liberals. Now even many conservative Democrats seem comfortable with the idea as a step toward curbing the growth of the deficit.

But Democrats remain divided over their strategy for framing the coming debate.

“There is not a uniform view in our caucus,” said an aide to a senior Democratic senator. “A portion of the caucus would like to pick a fight, accentuate the policy choice and have Republicans defend upper-income tax cuts. Another part of the caucus doesn’t like being seen as a tax-raiser in any context.”

The political sensitivities around the issue were laid bare during the healthcare debate, when many House Democrats -- especially freshmen and lawmakers from high-income areas -- wrote a letter warning that a proposal to pay for the healthcare bill with an income surtax could also hurt small businesses.

“Especially in a recession, we need to make sure not to kill the goose that will lay the golden eggs of our economy,” the letter said.