Tax Proposals in Obama’s 2010 Budget Outline

24 Comments on Tax Proposals in Obama’s 2010 Budget Outline

1. Matt on February 28, 2009
   
    

   I understand how you feel about this marriage penalty, but these “most common” jobs are not exactly common. Don’t forget the median household income is about $45,000. These couples — even if living in high cost-of-living areas — make roughly 5 times the median income. In terms of scale, that is a *ton* more money. The 95th percentile is around $155,000, so yes, households with $250,000 ARE in the top 1%.

   Take a look at the Wikipedia article for household income for more info:
   http://en.wikipedia.org/wiki/Household_income_in_the_United_States
2. TFB on February 28, 2009
   
    

   So all the statistics talk about “households” presumably from tax filing data. A single person is a household. A married couple is also a household. Even if two single persons live together but don’t marry, they are still two households as far as tax policies are concerned. A single person earning $125,000 stays below 95th percentile. If two such single persons marry, and have kids to support, they get into top 1% and must be targeted? Is it logical to compare one person against two? Shouldn’t we do it per wage-earner? Or are we nudging them toward divorce or never marrying?

   Those are good salaries. People go to graduate school for that. I thought we are supposed to make education pay. I can accept it if we draw the line at $125k per person or even $100k, because that eventually gets into how progressive the tax brackets should be. But not with a marriage penalty like that.

   If I’m not mistaken, other countries don’t have this marriage penalty business. In Canada, each person files tax for him- or herself, stand-alone.
3. Matt on February 28, 2009
   
    

   We should do it per wage-earner if we don’t want to have a progressive tax system. Progressive tax doesn’t simply mean you’re taxed more if you make more; it means you’re taxed more if you have more available money. A couple with $250,000 can buy a larger home, more expensive cars, better clothes, better food, and better just-about-anything-else than a single person with $125,000 can buy. It’s ok to be against the idea of taxing pooled income, but that’s regressive tax policy.

   If my wife makes $300,000/year, it’s pretty ridiculous (in only my opinion) for me to yell and scream that the government wants to tax my $15,000 in consulting at 35% because my wife makes so much money. I’m not going to say, “But I only made $15k! I’m poor! Tax me at 10%.”

   If you read the Brookings Institute’s Tax Policy Center report on marriage bonuses and penalties, it indicates it’ll cost $130 billion to keep marriage bonuses going for the next 7 years, most of the money from the bonuses goes to the wealthiest Americans, and that, for most married couples, it’s far more advantageous to file joint returns than separate returns, despite the fact tax rates can be higher.

   Really, though, in the end, you and I would just double different numbers: you’d rather double the single rate to $400,000 for marriages; I’d rather halve the marriage rate to $125,000 for singles.
4. TFB on February 28, 2009
   
    

   What can a married couple do that two unmarried persons cannot? Buy larger home, more expensive cars, better clothes, better food, and better just-about-anything-else? If I’m an executive earning $300k, versus two engineers earning $150k each, people would say, “Wow, you are more successful because your one income equals their two incomes.” I can afford to have my spouse not work. I will not mind paying more taxes and ending up with a lower after-tax income than the other couple because that’s the choice I make for having my spouse not work. That’s progressive. You are saying it should be other way around? They should pay more taxes than I do? Or I should be able to have my spouse not work and have the same after-tax income?

   If most of the marriage tax bonuses already go to the wealthy, like the executive in my example, then stop it. We shouldn’t subsidize that. Valuing each spouse equally as an individual as opposed to attaching one spouse as an adjunct to another is a progressive concept, isn’t it? Taxing each person as an individual will get rid of the marriage tax penalty and save money from dolling out the tax bonus to the wealthy.

   I already said I don’t mind making it $250k married and $125k single. So I agree with you there.
5. Matt on February 28, 2009
   
    

   Just as aside, I love your site and read every new post, so this is a fun argument for me, but I just want you to know I’m really thankful your site exists, and I hope you keep posting articles just like this one.

   I agree with you as far as the fact that if we got rid of marriage penalties, then we could also get rid of marriage subsidies, but we’d also lose taxes since there’d be no marriage penalty. I don’t know which is better in terms of generating tax revenue, but simply in terms of policy, I see your point.

   The executive making $300k will not pay at a lower tax rate than the couple making $300k, since both are above that magic number. And the bottom 95% of Americans would scoff at the notion that one wage earner at $150,000 does not provide enough income to allow the other spouse to stay home. You could *choose* to live a more upscale lifestyle, which would require both people to work, but the idea of a progressive tax is that the tax rate becomes higher and higher the further your income exceeds the amount necessary to pay for basic needs.

   The only people “hurt” by this marriage penalty are the significantly less than 5% of households where income is above $250,000 and where each member of those households is contributing less than $200,000 to the total household income.

   Your scenario of two $125,000 earners that pool their money together through marriage does work, but my point is that, in my opinion, you are significantly overestimating the number of households where that scenario exists. And while there might be a couple of condos in the Bay Area and New York where you have multiple single people living together, each earning between $125,000 and $199,999 and not pooling their money, again, very few of those households exist.

   I mean, think about the fact that this scenario contains a married couple making $250k+ that might want to file separate tax returns because they want to keep even more of their money, while the average family has two wage earners each earning around $25,000.

   There are 300 million Americans, and this scenario, at most, affects the top 10 million Americans. Out of those 10 million, we can’t count people who are single (no marriage penalty), and we can’t count the couples who each make over $200,000, since they’re not paying more in tax through marriage. So again, we can only count those couples who have a total income over $250,000, and then, it’s only a spouse who doesn’t make over $200,000 that is actually hit with a tax (since anyone making $200k+ would have been paying at the higher rate anyway).

   Can you at least conceptualize the rest of the American population thinking that a couple making $250,000 and a couple making $400,000 should be taxed the same? There just aren’t very many of those couples.
6. TFB on February 28, 2009
   
    

   Matt – Please don’t get me wrong. I’m not complaining about the extra taxes. I said I don’t have any opinion on whether the current rates are too progressive or not progressive enough. Maybe they are not progressive enough. Let’s raise them. No problem. In the post, I’m concerned about the line being drawn right at the knowledge worker level salaries. If that’s what it takes to correct the lack of progressiveness, I’m OK with it. Make it $250k/$125k, or $200k/$100k, or $100k/$50k, no problem.

   My complaints primarily relate to the marriage penalty.

   1) Marriage tax bonus doesn’t make sense. An executive who earns $300k with a non-working spouse should pay more than two engineers who earn $150k each. This is not the case today. It’s not limited to upper income levels. A single-income spouse who earns $100k should pay more than two spouses who earn $50k each, and so on.

   2) Tax penalty doesn’t make sense either. The same two engineers can do exactly the same they do today except being married, and they would pay less taxes. I don’t see how that is justified.

   A simple solution will fix all these. Tax each person as an individual on their own income. Get rid of the confusing filing statuses. We can redraw the brackets to whatever they need to be.

   If we can’t get there yet because we’ve had this married filing jointly tradition for too long, we should work toward marriage neutral. Let’s at least not introduce more marriage penalties. Make it $400k/$200k, or $250k/$125k, or $200k/$100k, or $100k/$50k, I really don’t have a problem with any specific set of numbers.
7. indexfundfan on March 1, 2009
   
    

   TFB, I agree with you. Marriage penalty does not make sense. I think Bush had talked about eliminating/reducing it. What is the new president’s stand?
8. TFB on March 1, 2009
   
    

   indexfundfan – The briefing by Tax Policy Center Matt referred to shows that a 2001 law reduced the marriage tax penalty in the lower brackets. This law sunsets in 2010. However, the way they did it also increased the marriage tax bonus, which doesn’t make sense either. President Obama does not reverse all Bush tax cuts. So I assume the reduction will stay put. But because he introduced a new marriage penalty in this budget outline, I’m afraid President Obama does not care much about reducing marriage tax penalty or he’s interested in increasing marriage tax penalty. Or as Matt eluded to, 95% of the population do not care how unfair some “rich” people are treated relative to other rich people because they are all rich. They equate that to whining.
9. TFB on March 1, 2009
   
    

   A search on barackobama.com shows this question about marriage penalty came up during the campaign. Obama’s advisors responded (search for the word penalty), by saying

   “The truth is that under Obama’s tax plan not a single new couple would get a marriage penalty because they have high incomes. Not one. … It is of course the case that in our current tax system some households face marriage penalties and other households get marriage bonuses. The Obama plan, like the McCain plan, would not change the number of high income families facing these penalties and bonuses. They would be the same under both plans.” (Emphasis added by me.)

   The keyword was the number of families, not the extent of the penalty. In other words, because these families already face marriage penalties which haven’t been eliminated by Bush, it’s OK to add more marriage penalties on them.
10. John on March 1, 2009
    
     

    When they say “earning over $250k”, are they talking about gross income, or adjusted gross income?
11. TFB on March 1, 2009
    
     

    John – Usually adjusted gross income.
12. indexfundfan on March 1, 2009
    
     

    TFB – thanks.
13. rob on March 2, 2009
    
     

    I suspect the problem is 125000 may not sound “rich” enough. Their focus groups probably said they would start to lose too much support at the level. Hence we have the marriage penalty.
14. Catdog on March 5, 2009
    
     

    The people who are earning higher incomes are the same that purchase new cars, buy homes, spend money and stimulate the economy; which in turn creates jobs. If you penalize the folks who worked hard (maybe are paying off student loans) to be successful, then you are in fact strangling the American Dream. There are plenty of folks who may have bought an new home have kids in college and now may not be able to afford the home or college with the tremendous amount of taxes hitting them all at once. This could be devastating to those folks. This will certainly cause more foreclosures, depress the real-estate market further, cause further losses to the banks and the cycle continues. Our un-employment continues to reach record levels but hey I have an idea, lets tax the corporations more so they can lay-off more Americans so we can run the tax dollars through our bureaucratic government and end up paying those that lost their jobs about $.25 on the tax dollar collected…great idea! What needs to happen is to create jobs by lowering taxes, allowing those wealthy folks to spend which will create demand for products which will cause demand for employment which will allow folks to buy more homes. This is where this mess started and no one is addressing that problem. But they continue to increase the jobless population. BAD IDEA.
15. D on June 2, 2009
    
     

    If the married couple are both working than give them the double but when only one person in the household works why should they get another tax deduction. As is, the government is giving all these tax deductions to the married couple and only one spouse working when in reality they should be getting the same deduction as the single tax payer otherwise it’s showing that since I’m a single taxpayer and having to do the double job of working and doing the work at home makes me less of a person in the eyes of the government.
16. LIsa on January 15, 2010
    
     

    Reinstate the personal exemption phaseout and limitation on itemized deductions for those taxpayers earning over $250,000 (married) and $200,000 (single).

    I find it pretty assuming on anyone’s part that considers a single person making $200,000 “rich”. Maybe that single person is divorced with children, paying child support and maybe that single person has elderly disabled parents that live with them and are responsible for their food, shelter and care, maybe that single person is supporting two households due to a partial custody agreement. And to not be able to claim deductions for that, is fucking UNFAIR. Progressive taxation is not fair.
17. Martin on January 25, 2010
    
     

    You are wrong that a “toolpusher” is a knowledge worker. The toolpusher is basically the foreman on a drill rig. At the moment, Chesapeake Energy is drilling a lot of gas wells and their toolpushers are earning a lot of overtime. If the price of natural gas moderates, toolpushers will be earning a whole lot less (or even be laid off).

    You talk about the “average pay for the most common salaried job.” Chesapeake Energy has 7600 employees. NetApp has 8000 employees. SC Johnson has a lot more, but I’ll bet a lot are hourly, so the average pay of all employees is much less. These are not significant numbers of American workers. Most purchasing of cars, homes, etc. is not made by these workers because there are not enough of them.

    Beyond that, I’m dubious that these tax increases are going to alter the behavior of what are (as Matt points out) high income individuals. These individuals get much bigger benefits, furthermore, from various tax deductions such as 401k or other retirement plans (an average wage earner can hardly max out their 401k, but someone at the 200k level can).
18. Joe Lauricella on February 1, 2010
    
     

    Hello: Under the Obama Tax Proposal ,will all income below the $250 K for married couples be taxed at the lower rates or once you pass the $250K threshold will all your dividends and capital gains all be taxed at the higher rates because you passed the $250K mark. How do the marginal tax rates work here.
19. TFB on February 1, 2010
    
     

    Joe – Obviously this is not law yet, just a proposal, and we don’t have all the details. But if it works similarly to the lower capital gains tax rate (currently 0%) for people in the 15% or lower tax bracket, it will work like this:

    If your taxable income without qualified dividend or capital gains is under $250k, any qualified dividend or capital gains between that number and $250k will be taxed at 15% and any extra qualified dividend or capital gains will be taxed at 20%. If your taxable income without qualified dividend or capital gains is already over $250k, every dollar of your qualified dividend or capital gains will be taxed at 20%.
20. Karashani on April 12, 2010
    
     

    My fiancee and I are in a situation where we are trying to decide whether to get married at the end of this year vs January 2010. Right now I earn about 50 K and my partner earns about 40 K. This September I am accepting a job where my gross pay is 380 K. My honey’s pay will not change. My partner will continue to work. Does it make sense tax wise to marry this year or next year? Please advise! ( By the way, although we are excited to be making this money, we have serious student debt and other obligations to take care of, not to mention a nonexistent retirement fund, so a few thousand dollars makes a difference ) .

    Confused.
21. TFB on April 18, 2010
    
     

    Karashani – If there is a big difference in pay between the two of you, you should marry this year rather than next year. That way more of your income will be taxed at her low rates.
22. Aj on June 24, 2010
    
     

    I am a higher wage earner in my household. We went from a combined 27,000 dollar a year income six years ago to a 260,000 dollar a year income. That’s a big jump. And we still have more money now then we would if we weren’t being taxed as much. My husband only contributes about 19,000 of our combined income. He lives in a house that has more than enough money coming in to pay a higher tax rate. Just my opinion of course.
23. sandy on October 4, 2010
    
     

    My husband and I both work as engineers. We make about around 260K (135, 125K). We both leave home at 6 in the morning and he gets back only at 9 while I get back at 6:30PM. Children are in daycare for long periods.

    My weekend gets spent on cooking for the week, laundry etc. I feel I am tired all the time. Same with him.

    How is it fair that we are taxed at the same rate as someone single making 260K with his spouse at home taking care of things.

    I am not against progressive taxing. But, do not tax me just because I am married. Tax me at the same rate what I will pay when I am single.
24. indexfundfan on October 4, 2010
    
     

    To sandy, looks like you and I are in very similar situations.

    The “solution” is to work less or have only one income. The democrats have no clue that this is the message that they are sending out to working couples like us. I am sure more than a few couples have already taken this route. The tax policies are great disincentives to work hard and be successful.

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