FROM TODAY'S WSJ
Anyone still need a reason to abandon "grand bargains" and deals
negotiated between this President and GOP Congressional leaders? Here it
is: The revival of two dormant provisions of the tax code means the
much ballyhooed $450,000 income threshold for the highest tax rate is
The two provisions are the infamous PEP and Pease, which aficionados of
stealth tax increases will recognize immediately as relics of the 1990
tax increase. Those measures, which limit deductions and exemptions for
higher-income taxpayers, expired in 2010. The Obama tax bill revived
them this week. It isn't going to be pretty.
Under the new law, some of the steepest tax increases may fall on
upper-middle class earners with incomes just above $250,000. Here's why:
During the negotiations, the White House won a concession from
Republicans to allow phaseouts for personal exemptions and limitations
on itemized deductions, starting at an income of $250,000 for
individuals and $300,000 for joint filers.
The Senate Finance Committee informs us that in effect the loss of the
personal exemptions, currently $3,800 per family member, can mean a 4.4
percentage point rise in the marginal tax rate for a married couple with
two kids and incomes above $250,000. A family with four kids in that
income range faces about a six percentage point marginal rate hike. The
restored limitations on itemized deductions can raise the tax rate by
another one percentage point.
High-income Americans with incomes of more than $1 million may lose up
to 80% of their itemized deductions for home mortgage payments, health
care, state and local taxes—and charities. Cue the local symphony's
Add it together and families in the 33% tax bracket could see their
effective marginal rate paid on each additional dollar earned rise to
A store manager married to a dentist with a combined income of, say,
$350,000 may pay a higher tax rate under the new law than if the tax
code had simply reverted back to the Clinton-era rates that Mr. Obama
championed. Those earning more than $450,000 would see their de facto
tax rate rise to about 41% under the new law, not 39.6%. Add in the new
ObamaCare investment taxes and the tax rate on interest income is close
How did this happen? Recall that early in the fiscal-cliff negotiations
House Speaker John Boehner offered to cap itemized deductions to raise
$800 billion, in lieu of raising tax rates, if the President would agree
to spending cuts. The White House rejected that.
Mr. Obama then insisted on reviving PEP and Pease, thereby recapturing
much of the income he claimed to be "compromising" away by agreeing to a
higher income threshold for the top bracket. But instead of using
phaseouts to offset higher rates as Mitt Romney proposed, Mr. Obama
insisted on raising tax rates too.
Democrats are advertising the higher $400,000-$450,000 threshold as a
victory for affluent taxpayers in blue states. But with PEP and Pease
these Democrats are hammering their own constituents via the backdoor.
Taxpayers in blue states claim roughly twice as much in itemized
deductions as those in red states. Income tax rates are steeper in
California and New York than Texas and Utah. Chuck Schumer just put a
tax bull's-eye on upper-income Manhattanites, and Barbara Boxer whacked
Silicon Valley. Some $150 billion, about one-quarter of all the money
raised by this tax bill, will come from this stealth tax hike.
Mr. Obama purports this is merely "a return to the Clinton-era tax
rates." But capital-gains rates will be about three to five percentage
points higher than in the 1990s, the Medicare tax is higher, and his
stealth tax will raise personal rates higher than advertised. Forget the
golden Clinton memories. Mr. Obama is pushing the U.S. back to the