The Impact of the Presidential Candidates' Tax Proposals on Effective Marginal Tax RatesKatherine Lim, Jeff Rohaly The text below is an excerpt from the complete document. Read the full report in PDF format.
A taxpayer's effective marginal tax rate (EMTR) is the percentage of an additional dollar of income that would be paid in federal income tax. An individual's EMTR could affect the decision to work or save more, or avoid income tax. We use the TPC's microsimulation model of the federal tax system to calculate EMTRs under current law and under the presidential candidates' proposals. The Obama plan would lower EMTRs for the majority of households in 2009. Close to 80 percent of the population would see no change in their EMTR under Senator McCain's plan; most others would face lower rates.
The tax proposals of both presidential candidates would alter marginal tax rates. Senator McCain’s plan changes statutory marginal rates and increases the dependent and alternative minimum tax (AMT) exemptions. Senator Obama would likewise change statutory rates and raise the AMT exemption, but he would also modify and expand existing credits and deductions and introduce new ones. Obama’s new and expanded credits would reduce the amount of tax owed by households and thus reduce average tax rates. At the same time, however, they would raise marginal tax rates for some households (because of refundability and phaseouts) while lowering them for others (because of phaseins and changing tax brackets).
A. Proposed Extensions of the 2001 and 2003 Tax Acts
Both Senator McCain and Senator Obama would extend most provisions of the 2001 and 2003 tax cuts (EGTRRA and JGTRRA), which are scheduled to expire after 2010. Under current law, the 10 percent income tax bracket will disappear in 2011 and the 25, 28, 33, and 35 percent brackets will increase to 28, 31, 36, and 39.6 percent, respectively. Senator McCain would extend the statutory rate schedule established by EGTRRA and JGTRRA. Senator Obama would extend the 10, 15, 25, and 28 percent tax rates but restore the 36 and 39.6 percent rates imposed on the highest income taxpayers.
The child tax credit (CTC) is scheduled to revert in 2011 from a partially refundable $1,000 credit per child to a $500 non-refundable credit. Senators Obama and McCain both propose to extend the credit in its current form. That extension would affect EMTRs in several ways. The CTC currently phases out for high-income taxpayers: the credit is reduced by 5 percent of income exceeding $75,000 for individuals and $110,000 for couples. The larger the credit per child, the greater is the income range over which the credit phases out. Raising the 2011 credit from $500 per child to $1,000—as both candidates propose—would thus extend the phaseout range and increase EMTRs for individuals whose income is too high to receive the $500 credit but who would be in the phaseout range if the credit were higher. Extending the partial refundability of the CTC would have the opposite effect on low-income households: it would lower EMTRs for those who are in the phase-in range that begins at $12,050 (in 2008; the threshold is indexed for inflation).
Pre-2001 tax law phased out both personal exemptions and itemized deductions for high-income taxpayers under provisions known as PEP and Pease. These phaseouts effectively raised marginal tax rates. PEP reduced a taxpayer’s personal exemptions by 2 percent for each $2,500 of AGI (or fraction thereof) above a specified threshold that is indexed annually for inflation. In 2009, the threshold will be $247,650 for married couples and $165,100 for single individuals. Pease reduced itemized deductions by 3 percent of the amount by which a taxpayer’s AGI exceeds a certain threshold (equal to $165,100 for all filing statuses in 2009 and indexed annually for inflation). The 2001 tax act gradually repealed both PEP and Pease beginning in 2006: for 2009, the amount of the phaseout of both exemptions and itemized deductions will be one-third of the pre-EGTRRA amount. Both PEP and Pease disappear entirely in 2010 but, barring legislative action, they will return in their pre-EGTRRA form in 2011.
(End of excerpt. The entire report is available in PDF format.)
No comments:
Post a Comment