WASHINGTON (July 19) - It's probably never a bad time to be rich. But the good times for America's wealthy could soon be a little less so.
President Barack Obama wants to boost income taxes for the wealthy to pay for tax cuts for everybody else. He wants to limit the deductions that high-income families take for mortgage interest and charity contributions to help pay for providing more people with health insurance.
House Democrats are planning to hit the wealthy with even higher income taxes to pay for their version of a health care overhaul.
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Between the plans, a family of four with an income of $5 million a year would see its annual income taxes skyrocket by more than $440,000. A similar family making $800,000 a year would get a tax increase of $30,000, according to an analysis by the financial services firm Deloitte Tax.
"I still think being wealthy is better than being poor," Clint Stretch, who heads tax policy at Deloitte Tax, said with a touch of understatement. "But this is a pretty high proposed tax burden."
Taxing the rich to pay for health insurance would represent a significant departure from the way Americans have financed safety net programs in the past.
Both Social Security and Medicare are supported by broad based payroll taxes. Although the rich pay more — they have bigger incomes — the burden is shared by the middle class and even the working poor.
By contrast, the health care plan working its way through the House would impose $544 billion in new taxes over the next decade on just 1.2 percent of households — joint filers making more than $350,000 a year.
The bill would impose a new 5.4 percent income surtax on couples making more than $1 million a year, starting in 2011. Couples making more than $350,000 would have to pay a surtax of 1 percent tax and those making more than $500,000 would pay a 1.5 percent surtax.
If certain savings in the health care system are not achieved by 2013, the surtax would rise to 2 percent for families making more than $350,000 and to 3 percent for those making more than $500,000.
For a family of four making $450,000 a year, the initial tax increase would be $1,000, according to the Deloitte analysis. But for the super rich, like a single filer making $5 million a year, the tax increase would be $452,000. The analysis assumes a typical mix of earned income, capital gains and itemized deductions for each income level.
Democrats said that for most of the affected taxpayers, the surtax would be far smaller.
"What we're talking about is frankly very, very small amounts for the overwhelming majority of people who will pay it," said Rep. Artur Davis, D-Ala.
The top marginal income tax rate now is 35 percent, on income above $372,950. Obama wants to boost the top rate to 39.6 percent in 2011 by allowing some of the tax cuts enacted under former President George W. Bush to expire.
The House Democrats' proposed health care surtax would increase the top rate to 45 percent, making it the highest top rate since 1986, when it was 50 percent.
Republicans complain that some taxpayers would face marginal tax rates above 50 percent, when federal and state taxes are combined. They also say that tax increases on the wealthy hurt small business owners who typically pay their business taxes on their individual returns.
Democrats say the tax increases would affect only 4.1 percent of tax filers who report small business income. Those small businesses, however, tend to be the ones that employ the most workers, according to data from the National Federation of Independent Business.
"We shouldn't have to resurrect the 1970s to remember that when tax rates go too high, people lose the incentive to build new businesses and create jobs," said Rep. Wally Herger, R-Calif. "These massive tax increases are no substitute for real fiscal responsibility."
Obama has tried to make the rich a popular target for tax increases as Democrats struggle to find ways to pay for his plan, intended to assure that virtually everyone gets health care. He regularly portrays the wealthy as big winners under Bush, noting that their taxes dropped and incomes soared during Bush's eight years in office.
"I think the best way to fund (health care) is for people like myself who have been very lucky, to pay a little bit more," Obama said recently.
The argument, however, omits the fact that Bush also cut taxes for middle- and low-income people. Their incomes didn't jump as much as they did for the wealthy, but effective federal tax rates for middle-income and low-wage workers are at or near 30-year lows.
This year, 47 percent of filers won't owe any federal income taxes — including some families making as much as $50,000 a year, according to separate projections by the Tax Policy Center and Deloitte Tax.
"Right now, if you are middle class or below, you are not expected to help pay to solve these problems," said Stretch, the tax policy adviser.
