Background. President Obama released his federal budget proposals for fiscal year 2014 on April 10. The proposals include a host of tax changes for businesses and individuals, as well as a switch to the use of “chained CPI.”
Provisions that would result in tax increases. The following provisions in the President’s budget are projected to bring in the following amounts in gross receipts, and reduce the deficit by that amount, over the 2014-2023 period:
… Reduce the value of itemized deductions and other tax preferences to 28% for those with income in the top three (i.e., 33%, 35%, and 39.6%) tax brackets—$529 billion.
… Observe the “Buffett” rule, also referred to in the budget as the “Fair Share Tax,” under which households with at least $1 million of income pay a minimum of 30% in taxes (after charitable contributions)—$53 billion.
… Tax carried interest income as ordinary income, instead of at the 20% capital gains rate—$16 billion.
… Limit the amount that an individual can accumulate in a tax-preferred retirement account to $3 million—$9 billion.
… Require non-spouse beneficiaries of IRA owners and retirement plan participants to take inherited distributions over no more than five years—$5 billion.
… Return estate tax to 2009 levels and close loopholes—$79 billion.
TPC’s distributional analysis. The TPC projects that, by 2023, the President’s cumulative 2014 budget proposals would impact taxpayers as follows:
- Tax units (i.e., an individual, or a married couple who file a tax return jointly, along with all dependents) with incomes (measured in 2012 dollars) under $30,000 would pay less in taxes. Tax units making less than $10,000 would see an overall increase in their after-tax income of 2.7%, which is the largest projected increase.
- Tax units with incomes from $30,000 to $75,000 would pay slightly higher taxes. The average federal tax rate for tax units in this group would increase by 0.1 or 0.2 percentage points, reflecting an actual tax increase of $54 to $141.
- Tax units with incomes from $75,000 to $200,000 would see an average rate increase of 0.2 percentage points, resulting in an actual tax increase of $269 to $382.
- Tax units with incomes from $200,000 to $500,000 would face a 0.9 percentage point rate increase, resulting in an average tax increase of $2,933. This would reflect a -1.2% change in after-tax income.
- Tax units with incomes from $500,000 to $1 million would face a 1.6 percentage point rate increase, resulting in an average tax increase of $13,474. This would reflect an average -2.4% change in after-tax income. This group represents approximately 0.6% of all tax units.
- Tax units with incomes over $1 million would face a 2.3 percentage point rate increase, resulting in an average tax increase of $96,112. This would represent an average -3.7% change in after-tax income. This group represents approximately 0.5% of all tax units.
Broken down by share of total federal tax increases, using the 2023 model, TPC projects that 62.4% of the increase would be borne by the tax units with incomes over $1 million, 10.3% of the increase would fall to those making between $500,000 and $1 million, and 15.7% would go to those in the $200,000 to $500,000 range. Thus, 88.4% of the total increase would be borne by tax units with incomes over $200,000.
According to TPC, there are 905,000 tax units with incomes exceeding $1 million, and slightly over 1 million tax units with incomes in the $500,000 to $1 million range.
Dean R. Holland, CPA