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Comparing Tax Plans: Obama 2013, Reagan 1983, Ike 1953

The new Obama White House federal budget for 2013 advances a vision for a significantly more progressive tax code. But that vision, if realized, would still not restore all the federal tax progressivity lost since the early 1980s.

Wall Street Journal columnist Daniel Henninger is calling the new budget the White House released last week “a work of literature.” He means no compliment.

Henninger and his fellow apologists for grand private fortune consider the new Obama budget a work of reprehensible public policy fiction, a blueprint for “large wealth transfers” that amount to an unconscionable tax on “national success.”

Henninger and friends need to get a grip. Those wealthy paragons of “national success” they so admire would survive quite comfortably the adoption of any or all of the Obama budget’s new taxes.

Indeed, even if Congress adopted every new tax this budget advances, not one wealthy American would next year face a top-bracket tax rate higher than 39.6 percent. Back in Ronald Reagan’s first term, income in America’s top bracket faced a 50 percent tax rate. The republic survived.

So why all the squeals of anguish out of right-wing fan clubs for rich people? Is the anger over the new Obama budget just more conservative political theater?

Not really. The tax proposals in the budget plan released last week actually do signal a turn — toward more genuine tax progressivity — on the part of the Obama White House. The right seems to sense that.

The tax proposals in the new Obama budget plan released last week signal a turn toward more genuine tax progressivity.

We can see this new White House turn in two proposals the budget for 2013 promotes, one narrow and quite specific, the other broad and vague.

The narrow pitch addresses dividend income.

Some background: The Obama White House has always supported the eventual expiration of the 2001 and 2003 Bush tax cuts for wealthy taxpayers. But the White House, until last week, has focused only on the Bush tax cut that sliced the tax rate on top income-bracket income from 39.6 to 35 percent.

Last week, for the first time, an Obama budget acknowledged that the Bush years had also cut the tax rate on dividend income down to 15 percent, from 39.6 percent. The Obama White House had previously let this tax cut slide.

Not anymore. The new Obama budget advocates an end to preferential tax treatment on the dividend income that goes to wealthy taxpayers. Couples making over $250,000 would under this new budget face a 39.6 percent tax rate on their dividends, the same as they did in the Clinton years.

Capital gains income, on the other hand, would continue to receive preferential treatment under the new Obama budget, only less of it. America’s wealthiest now pay just a 15 percent tax on the capital gains they make trading stocks and other assets, the main reason why they pay so little of their incomes in taxes. 

The new White House budget has a plan to offset the continuing preferential treatment for capital gains.

The Obama budget has this 15 percent capital gains tax rate rising only to 20 percent. But the new budget has a plan to offset this continuing preferential treatment for capital gains. Americans  “making over $1 million,” the budget proposes, “should pay no less than 30 percent of their income in taxes.”

The new Obama budget gives this “Buffett rule” no other specifics. This lack of detail doesn’t particularly matter one way or another right now, since Congress as currently constituted is not going to adopt the Buffett rule in any shape or form this year — and everyone on Capitol Hill knows it.

In this charged political environment, the new Obama budget essentially serves as a campaign manifesto, a declaration of where the Obama administration wants to go in a second term.

The big tax question on this declaration: Does the administration want to go far enough — toward its stated goal of “a simpler, fairer, more progressive tax system than we have today”?

The answer gets tricky. The Obama budget tax framework, if adopted, would no doubt leave the tax system significantly more progressive. A 30 percent millionaire minimum tax would all by itself have a substantial impact. In 2008, the last year with data available, the nation’s top 400 taxpayers only paid 18.2 percent of their incomes in federal income tax.

Add to this 30 percent Buffett rule the dividend tax hike and other proposals the White House reiterates in the new budget — the return to a 39.6 percent top-bracket rate, the repeal of the “carried interest” loophole that enriches hedge fund kings, a limit on the benefits the wealthy can claim from tax deductions — and the nation would have a distinctly more equitable and progressive tax code.

In 1953, taxpayers who made over $1 million paid far more of their incomes in federal tax than millionaires would pay under the new White House budget.

The effective tax rate on Americans who make over $1 million currently averages around 25 percent. In 2013, under the Obama budget, millionaires would likely average a federal income tax bill that equals somewhere between 30 and 35 percent of their incomes.

Not chopped liver. But not adequate either. The current White House tax vision for 2013 and beyond simply leaves too much money on the table — money the rich have siphoned off from America’s 99 percent, money that could be rebuilding the American middle class.

A little history can be useful here. In 1953, the heart of our middle class golden age, taxpayers who made at least $1 million — in today’s dollars — paid far more of their incomes in federal income tax than millionaires would pay in 2013 under the new White House budget. Our 1953 rich, after taking advantage of every loophole they could find, paid taxes at nearly a 55 percent effective rate.

Sign up for To MuchBut we don’t have to go back 60 years to find an American rich more heavily taxed than our rich would be under the new White House budget. Just 30 years ago, after the first round of Reagan tax cuts, millionaires ended up paying, after loopholes, nearly 39 percent of their 1983 incomes in federal tax.

The 2013 budget won’t get us back to 1983, much less 1953. But the budget does move us in the right tax direction. That counts. And, besides, any tax plan that really steams our guardians of “national success” does offer pleasures aplenty.

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