Just days after President Obama outlined his proposed budget, which includes tax modifications (yeah, it’s a cheesy word, keep reading) for high wage earners, key leaders in Congress are making noise that they might not be in support of the plan. Chief among them is Senate Finance Committee Chairman Max Baucus (D-MT) who questioned whether the plan would work.

The White House is touting the plan as necessary to make a dent in a spiraling deficit and to pay for the cost of health care reform. At least half of the funds for those are expected to come from revenue raised from the tax increase.

But is it a tax increase? Phase one of the plan is to increase the top tax rate on individual taxpayers earning more than $200,000 and married taxpayers making more than $250,000 from 35% to 39.6%. Opponents of the increase say that Obama is singling out successful taxpayers. But the White House is careful to point out that the “increase” is actually the result of the expiration of a tax cut enacted under President Bush. The Bush tax cuts were not made permanent and are scheduled to sunset back to the original rates in 2011. In other words, those rates will increase if Congress doesn’t do anything at all (a pretty good bet).

More problematic for the Obama administration is the plan to limit deductions. As previously blogged, the White House has proposed limiting deductions for charitable donations, mortgage interest, and state and local taxes. Under the current rate structure, taxpayers in a 35% tax bracket save $350 for each corresponding $1000 in deductions. Reducing the deduction limit to 28% means that taxpayers in the highest brackets would lose $70 in tax savings for each $1000 in deductions. Interestingly, these are the same deduction limits that were in effect during the Reagan years (though the top rates were lower).

Republicans have criticized the plan, citing concerns about the effects on charitable donations. Democrats have echoed these concerns, making it clear that the proposal is by no means a done deal.

Here’s my prediction: Congress does nothing. Sure, that’s a good prediction at the best of times. But this time, I’m serious. If Congress does nothing, the top rates go up anyway and the deductions remain at their current rates. Voila! Congress at work.

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.


  1. “Interestingly, these are the same deduction limits that were in effect during the Reagan years (though the top rates were lower).”

    The deduction just allows the taxpayers to not pay taxes on the money he or she donates to charity. SO of course the deduction rises and falls based on the marginal rates. The White House is being completely disingenuous in making the statement that the deduction is the same as in the Reagan years. How can you give this statement legitimacy by repeating it as if it is an argument that can be made (and putting the caveat in parentheses doesn’t help).

    • I repeated it because I think it is noteworthy. Charitable donations (and other deductions) are not a dollar for dollar reduction in taxes or income. The deduction doesn’t result in a wash for any taxpayer, so it’s not true that the deduction allows taxpayers to not pay taxes on the money donated to charity – you still really just get a small percentage. The point that the administration is making is that these caps are not wildly disparate with prior rates, which is true. This is not to say that I’m in favor of the proposal (I’m not) or that I think it will pass (I don’t).

  2. garagefather Reply

    The best thing for economy is for the congress to do nothing. Everything they have done this year in regards to stimulus and these bailouts has been counter productive. Investors know it is a joke, wall street knows it is a joke, companies (other than construction) know it is a joke, and soon the American people will realize that it was all a joke.

    Obama is like the fiancee that cannot see that their choice for marriage is bad. Everyone tells the fiancee that the person is bad but they love them so much that they cannot take the advice of everyone else. Obama loves his proposals so much that he doesn’t care about the damage they bring or the costs they will incur because he loves the ideas and doesn’t care about the consequences.

    He said he wants to build the economy from the bottom up. What? A first year economist major knows that it doesn’t work that way. Most average citizens know it doesn’t work that way. It is real simple: how many employers have you had that are on the bottom of the economic scale? Yeh! Thats right, none!

    I feel that I am in a twilight zone episode where common sense does not exist. This isn’t very hard but the main stream media has no curiosity about the continual lack of common sense by this administration and thus we see very little main stream criticism….. And we all thought bush was stupid! Bush inherited a recession and cut taxes though. His agendas helped end the last recession. Reagan inherited much worse than Obama or Bush and lowered taxes and got us out of a recession that had gone on for years.

    Everyday, my 401k is crushed. Everyday, Obama sits in ignorance promoting the stupid ideas of the Carter and Johnson administrations while creating new stupid ideas for stimulating the welfare state.

    We would all be better off if they all took a 2 year vacation. That way they couldn’t continue to do more damage. It looks like Dems in congress are finally accepting that they are just making things worse. Why else would they dare oppose the messiah.

  3. I agree that many of the proposals currently being touted don’t make sense. But I would hardly hold any of our recent presidents as the poster children for fiscal responsibility… All contributed substantially to our deficit.

    Reagan may be remembered best for his 1981/1982 tax cuts but I think one of the things that was most impressive about his administration was his ability to change course, to admit when things weren’t working. The 1986 tax changes were among the most significant in tax history – and were also a departure from his earlier tax plans. One of the things that we’ve lost since that time is the ability to take a step back, assess a situation and make changes. In an increasing polarized Congress, it’s more about winning than doing the right thing.

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