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The Truth About An Important Part Of President Obama’s Tax Plan

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"The Truth About An Important Part Of President Obama’s Tax Plan"

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Our guest blogger is Seth Hanlon, Director of Fiscal Reform at the Center for American Progress Action Fund.

In reporting about the tax reform plan released by the Center for American Progress yesterday, several news outlets mischaracterized an aspect of President Obama’s (not identical) tax plan. They reported that the President’s plan would put in place a 39.6 percent top income tax rate starting at $250,000 of income for couples and $200,000 for singles. But that’s not the case.

In fact, under President Obama’s plan, the 39.6 percent top rate would begin at $398,350 of taxable income next year.* That’s the same income level where the current top rate of 35 percent begins, adjusted for inflation. In fact, it’s the same income level where the 39.6 percent bracket began during the 1990s, adjusted for inflation.

The confusion stems from the fact that the President’s plan is designed to raise the top two tax rates without raising taxes on any married couples with adjusted gross income (AGI) of $250,000 or below or singles with AGI of $200,000 or below. But income above those thresholds** and below $398,350 would be in the second-highest bracket under President Obama’s plan, not the highest bracket. The tax rate on that income would be 36 percent, up from the current 33 percent.

Under President Obama’s plan, the rates on all income below the $250,000/$200,000 thresholds (covering roughly 98 percent of taxpayers) stay the same as they are now.

CAP’s plan is distinct from what President Obama has proposed in many ways but our proposed top rate (39.6 percent) and the income level where that rate begins to apply is exactly the same. As we indicated in the description of our plan, that level would be at about $422,000 in 2017, given estimates of future inflation. (Our plan showed proposed tax brackets for this later year because we assumed it wouldn’t go into effect in 2013.)

Restoring the top tax bracket that existed during the 1990s is, of course, only one aspect of CAP’s plan for a progressive, revenue-enhancing overhaul of the tax code. You can read about the other reforms we propose here.

* $398,350 is an unofficial estimate. Official brackets for 2013 have not been released yet and, of course, Congress has yet to resolve the tax rates for next year.

** The second-highest bracket would not start exactly at those levels because President Obama’s $200,000 and $250,000 thresholds refer to adjusted gross income (or “AGI,” which is income before personal exemptions and deductions), not taxable income, and because his proposals raise those AGI thresholds to reflect inflation since 2009. Given these factors, the 36 percent bracket would start at about $247,000 of income for couples and $203,600 for singles next year.

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