“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Saturday, June 28, 2008

Obama on Taxes

The chart tells the tale. The Republicans have not stopped spending and in fact have increased non-discretionary spending by increasing present and future obligations. Where do you go from here?

What Obama means by tax the wealthy
Here's a closer look at how the Democratic candidate defines well-off for different households, and what his proposals will mean for them.

By Jeanne Sahadi, CNN
Last Updated: June 28, 2008: 9:52 AM EDT

Special Report

NEW YORK ( -- Most voters are aware that Barack Obama wants to raise taxes on high-income taxpayers if he's elected president in November.

But what does the Democratic candidate mean by high-income? Who'd be affected and how? While the Obama campaign must still settle on more details about their plans, outlines are starting to emerge.

To start, Obama frequently cites $250,000 as the line between those who would be subject to higher taxes and those who wouldn't.

Indeed, under Obama's tax plan, married couples with at least $250,000 in gross income are likely to see their taxes go up if Obama is elected president.

But what about single filers? The line for them would likely be about $200,000, according to an Obama adviser.

Those groups could end up paying anywhere from several thousand dollars to tens of thousands of dollars more to Uncle Sam than they do now, according to estimates from the Tax Policy Center.

From income to Social Security to estates, we take a look at four areas where the high-income set and the very well off may be subject to a bigger tax bill in an Obama administration.

Income taxes

Obama would restore the top two income tax rates to their pre-2001 levels of 36% and 39.6%. Currently they're 33% and 35%.

Obama's proposal would also reinstate some limitations on how much of a given deduction or personal exemption high-income taxpayers may take.

However, not everyone in the top two brackets would necessarily be affected by the rate increase. Much depends on whether they've been subject to the Alternative Minimum Tax (AMT) in the past.

You're supposed to calculate your tax liability under both the regular income tax code and the AMT. If your bill under the AMT is bigger, you must pay that.

The Obama rate increase would certainly narrow the spread between the two - since the amount owed under the regular code would go up. The question is would the amount you owe because of the increase exceed your AMT bill.

"Until the regular tax starts exceeding the [AMT bill], you won't have an increase," said John Battaglia, a director in the private client advisors practice of Deloitte. "But if people are deep into AMT, it wouldn't matter."

For example, if the rate increase would mean you owe $2,500 more under the regular code, but your AMT bill is normally $5,000 more than your regular bill, you would still pay the AMT.

Payroll taxes

In addition to wages up to $102,000 - the current cap on salary subject to the payroll tax, which funds Social Security - Obama would also tax amounts over $250,000.

In other words, income between $102,000 and $250,000 would be protected.

Obama's stated goals are to better fund the Social Security program - which faces a long-term shortfall - and to make the system more progressive. Currently, the vast majority of Americans pay the Social Security tax on 100% of their income because they don't make more than the $102,000 wage cap. By contrast, very highly paid taxpayers only pay Social Security tax on a portion of their income. People who make $204,000, for example, only pay the tax on 50% of their income.

The rate at which salary is taxed for Social Security is 12.4% (half of which is normally paid by employees and half by their employers).

Obama hasn't said whether the money from wages and salaries over $250,000 would be taxed at the same rate. If it were, the person making $300,000 in gross income - $50,000 above the $250,000 watermark - would pay an additional $3,100 into the system annually (6.2% x $50,000).

We also don't know whether the benefits promised to the highest income workers would go up as a result of their paying more into the system.

"Those are details that Senator Obama would want to work out on a bipartisan basis with Congress," an Obama adviser said.

That lack of specificity concerns some tax experts. "If Obama is hinting that those making more than $250,000 would pay a higher payroll tax rate ... it would fundamentally change the way Social Security operates and run the risk of making the program look less like social insurance and more like welfare," Tax Vox blog editor Howard Gleickman wrote for the Tax Policy Center.

Investment income taxes

Long-term capital gains used to be taxed differently than dividends, which were subject to one's top income tax rate. Under the 2001 and 2003 tax cuts, gains and dividends are treated equally. Currently the most one would pay is 15%.

Both rates are scheduled to rise by 2011 - long-term gains to 20% and dividends would once again be taxed a taxpayer's top income tax rate for dividends.

Obama would continue to treat gains and dividends equally and would keep the current rate in place for everyone except high-income households.

He hasn't specified how high he'd like to make the rate, but observers expect and Obama himself has virtually said that the new rate likely would fall between 20% and 25%.

Estate tax

Finally, Obama's proposals to tax wealth are not only defined by income levels.

When it comes to family wealth, for instance, Obama favors maintaining the estate tax, which is scheduled to be repealed in 2010 for one year. But he would limit its reach.

Obama would freeze the estate tax exemption amount at $3.5 million - up from its current $2 million level and the $1 million level it's set to revert to in 2011. He would also keep the current top rate of 45%, which is below the 55% it is set to revert to in 2011.


  1. Personally, I would prefer to cut government spending by eliminating departments and federal functions of dubious value. Of course we immediately have to ask what is dubious. The recently enacted medicare prescription drug program should be scrapped in its entirety. Increase retirement age to 70 for able bodied people.

    Go to use taxes where possible.

    Increase consumption taxes.

    Eliminate all taxes on savings and investments in domestic enterprises.

  2. I’ll wade into this one.

    Personal Income Tax. So what I am hearing is that, because of the controlling effect of the AMT, this populist “increase taxes on the wealthy” theme is a chimera that would yield squat.

    Social Security Tax. The $250,000 question still unanswered - so when you try to access their money to pay for SS, do they get some benefits - even though government benefits likely not needed at that salary level?

    Investment Income Taxes. The rate should be indexed to a set of metrics keyed to GDP and growth. I expect that is exactly where these rates come from, but I am not certain. It is too much of a political lever.

    Estate Taxes. What’s an estate?

    I don't see any miracle here.

  3. Just as a slighlty off-topic question, but there seems to be quite the controversy over whether Obama's universal health care proposal will cover the 12 million illegals.

  4. The one populist bandwagon I will jump on - in light of the recent court ruling that looks like Grasso will be allowed to keep what’s left of his $140M compensation package after paying litigation fees - the egregious blot on the business landscape is corporate compensation.

    Some numbers.

    In 2007, the CEO of a Standard & Poor’s 500 company received, on average, $14.2 million in total compensation, according to preliminary numbers from The Corporate Library, a corporate governance research firm. The median compensation package received was $8.8 million.

    While back in Washington.

    President Bush and Vice President Cheney have told audiences that Social Security faces an $11 trillion shortfall if nothing is done to fix the current system. But they fail to mention that this is over the course of the “infinite future." Over the next 75 years -- still practically a lifetime -- the shortfall is projected to be $3.7 trillion.

    Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 14 percent in payroll tax revenues (from 12.4 percent to 14.1 percent) or an immediate reduction in benefits of 12 percent or some combination of the two. Ensuring that the system is solvent on a sustainable basis beyond the next 75 years would require larger changes, because an aging population and increasing longevity cause the projected current-law OASDI [Old-Age and Survivors and Disability Insurance] cash-flow deficits to be substantially larger after the 75-year projection period than they are on average during the period.
    The projected actuarial deficit in the OASDI Trust Fund over the infinite future is 3.2 percent of taxable payroll (1.1 percent of GDP), or $13.6 trillion in present value terms. The system could be brought into actuarial balance over this time horizon with an immediate increase in payroll tax revenues of 26 percent (from 12.4 percent to 15.6 percent) or an immediate reduction in benefits of 20 percent, or some combination of the two.

    But we have to fix housing before we can fix the economy.

  5. even drove through a tree, but there weren't that many folks around.

    You mean you drove into a tree? :)

    Drive Through Tree

    First time I becam aware of that was in a Mickey Mouse comic book as a kid. Been there too.

    There's also a one tree house.


    We all have our bugaboo. With me it's the increase in the capital gains tax. A tax on the passage of time.

    An estate tax may be a necessary thing. There's a point at which wealth becomes too concentrated. People vastly rich all their lives, done nothing to earn it. getting dividends, massive ones. Passing it all on to the kids. Creates a class society. The rich eat steak and lobsters, the poor eat grass sort of thing. It warps the civic landscape. But, where to draw the lines is always the question. Surely Soros and Gates ought to pay something.

  6. Bobal: There's also a one tree house.

    Yes bobal, but even inside a log house made from a single log a woman's work is never done.

  7. hhehee

    There better not be any red wood chips, cones, or needles around.

    Kind of like a fairy tale house out of the Brothers Grimmm. But, is it the wicked mother in law, or the princess that lives there? Only the foresters know for sure.