Whether or not there is a fiscal cliff deal, tax rates will almost certainly go up on Jan. 1, thanks to new Medicare taxes that Democrats passed in 2010 to offset the cost of ObamaCare.
That's why President Obama's call for a return to Clinton-era tax rates is misleading: If the Bush upper-income tax cuts go away, tax rates will exceed those in place at the end of the 1990s.
The top effective federal marginal tax rate on work income would rise to roughly 44.6% from 37.9% in 2012.
That's higher than under President Clinton because of a 0.9-percentage-point Medicare payroll tax hike for upper-income households, which passed with Obama-Care and takes effect in January.
Tax rates on long-term capital gains also will be higher than when Clinton left office if Bush tax cuts expire as ObamaCare's new 3.8% Medicare tax on investment gains takes effect. Up to now, only wage and salary income has been subject to Medicare taxes.
Dividend Tax Rate Triples That's among the reasons that the top effective tax rate for dividends, in line with the 15% capital gains rate since 2003, would jump all the way to 44.6%, in line with the top tax rate on regular income.
That prospect has led companies such as Wal-Mart Stores (WMT) and Walt Disney (DIS) to hustle out dividends scheduled to go out after the tax cliff hits. Other firms such as Costco (COST) and Las Vegas Sands (LVS) are paying special dividends to take advantage of current rates while they last.
The nearly 7-percentage-point potential increase in the top effective marginal tax rate on regular income would come from three different tax hikes: 1) The top income tax rate going from 35% to 39.6%; 2) The Medicare tax going from 2.9% to 3.8%; and 3) The return of the Pease deduction limit, which amounts to a roughly 1.2-percentage-point marginal rate hike.
The latter tax, so named because Democratic Rep. Donald Pease proposed it in the 1990 budget deal, gradually reduces the value of deductions by up to 80% starting for households with $177,550 in income.
Capital Gains Rate Spike The tax rate for long-term capital gains would rise from 15% to 23.8% for upper-income households, above the 20% rate that prevailed in the last years of Clinton's presidency. Tack on the effective rate increase from the Pease deduction limit and the capital gains tax rate will rise to 25%, says the Tax Policy Center.
Letting the Bush upper-income tax cuts expire and restoring the estate tax to its higher 2009 level would raise taxes by just shy of $1 trillion over 10 years. That includes: About $450 billion from raising the top two rates.
$200 billion from the dividend tax hike.
About $40 billion from the higher capital gains tax.
$160 billion from limiting deductions and personal exemption for high earners.
Another $120 billion would come from raising the estate tax rate to 45% from 35% now and lowering the exemption from $5.1 million to $3.5 million.
In addition, Obama's Medicare tax hike would raise $300 billion over 10 years. Other ObamaCare tax hikes also are set to take effect in January, including a 2.3% excise tax on medical devices and a 10%-of-income threshold (up from 7.5%) before medical costs can be deducted.
ObamaCare taxes should be on the table in fiscal cliff talks, Rep. Jim Jordan, head of the conservative Republican Study Committee, said Friday.