How Obama's tax plans would 'spread the wealth around'

Barack Obama's message to "Joe the Plumber" that "when you spread the wealth around, it's good for everybody," gave Republicans an opportunity to charge the Illinois senator with wanting to raise taxes and redistribute the extra revenue.

Recent public opinion polls indicate that, regardless of the charge, Sen. Obama will probably become president next year. So his plans to share the wealth become extra significant.

"I don't mind paying just a little bit more than the waitress that I just met over there [who] ... can barely make the rent," he told Joe Wurzelbacher, the Ohio plumber. "Because my attitude is that if the economy's good for folks from the bottom up, it's gonna be good for everybody."

If Obama actually does occupy the White House in January, his tax proposals will be subject to the will of Congress. These proposals could remain more intact if Democrats obtain a veto-proof majority of 60 in the Senate. A continued economic slump also will shape the design of any tax changes.

In any case, Obama's tax plans indicate he wants the income tax and estate tax to be progressive, that is, costing the well-to-do proportionately more than the middle class and the poor. Whether his plans are stern enough to end the decades-long drift of income to the very highest rung of the income ladder is debatable. The blows of the present financial crisis to the wealth of many rich people may do that trick for a time.

What Obama proposes is to allow President Bush's income tax cuts of 2003 to expire for married couples with adjusted gross incomes (AGI) above $250,000 and single people with AGI of $200,000.

That change would hit only the most affluent 2.3 percent of American taxpayers, figures Bob McIntyre, director of Citizens for Tax Justice, a liberal think tank in Washington. Obama would extend the Bush income tax cuts and enact several new tax cuts for the remaining 97.7 percent of taxpayers. So Joe the Plumber would get a tax break since he's not one of the 2.3 percent taxpayers.

Should Mr. Wurzelbacher reach his dream of becoming wealthy, his tax burden could become larger under Obama's plan.

After the Bush tax cuts, the top 1 percent of taxpayers ($978,000 or more income in 2004) paid 24.6 percent of their income in federal taxes and 8.2 percent in state and local taxes, for a total of 32.8 percent of income in all taxes. The Bush tax cuts saved this prosperous group 12 percent in taxes. For the remaining 99 percent, combined taxes averaged 29.4 percent of income, and they got a smaller percentage savings (3 to 8 percent). This tax table has not been updated since 2004. But Mr. McIntyre holds there would be little change in the percentages today.

His tax calculations include payroll taxes for Social Security and Medicare – a tax bill that is less significant for the well-to-do since the Social Security tax of 12.4 percent of income stops being deducted on income above $102,000. About three quarters of taxpayers pay more in payroll taxes than they do in federal income taxes. Famed investor Warren Buffet has occasionally noted that his secretary pays federal taxes at a higher rate than he does because of payroll taxes.

Under Obama's plan, the marginal federal income tax rate for those with the highest incomes would go back to 39.6 percent from 35 percent, perhaps earlier than already scheduled under the Bush tax-cut legislation for the end of 2010. Also, Obama would impose a smaller payroll tax, perhaps 2 to 4 percent but not yet specified by the Obama campaign, on income above $200,000 and $250,000. So the marginal federal tax rate – the rate on the last dollar earned – could climb as high as perhaps 43 percent.

The marginal rate, if very high, can discourage the well-to-do from working as hard, some economists argue. But their actual tax burden would be much lower because of all the deductions taxpayers take on such items as gifts to charities, real estate taxes, mortgage interest, etc. Obama, it's reported, might want to phase out some of those deductions for higher-income folk.

So in theory, the actual tax burden could go up to a bit more than the pre-Bush-tax-cut level of 37.1 percent of income for all taxes for the top 1 percent of taxpayers. But McIntyre suspects that with the other tax cuts proposed by Obama, even the richest taxpayers would get "a slight net tax cut." As it is, notes McIntyre, the richest 1 percent paid about 23.6 percent of total federal taxes last year. But with the growing concentration of income at the top, that group also received a roughly equal share of total income in the United States, 22.4 percent.

As for the estate tax, Obama proposes excluding anyone leaving less than $3.5 million, and charging a tax of between 15 and 45 percent for amounts over that limit. His plan would preserve about 60 percent of current-law estate-tax revenue, according to the Tax Policy Center in Washington, weakening a little what it describes as "the most progressive component of the federal tax code."