GOP gives a hidden tax break to the upper incomes

Conservatives will not raise taxes. Grudgingly, they agreed to eliminate the Bush tax cuts, and return to the tax rates in effect during the Clinton, budget-balancing era. But they slipped in a change in the tax brackets that maintains significant tax breaks for upper incomes. This tax bracket structure costs the US Treasury in excess of $23 BILLION per year.

The federal budget was last balanced in 1996 under President Clinton. At the time, the highest federal income tax bracket was 39.6%. The Bush tax cuts, in 2001, lowered the highest tax rate to 35%. On January 1, 2013, the higher rate of 39.6% was restored. Theoretically, then, the highest income earners in the United States were once again paying the same level of taxes as they were when the budget was last balanced.

Unfortunately, that is not happening.

The reason: the size of the tax brackets.

In 1996, tax brackets broke down this way:

Tax rate      Income up to

15%            $24,000

28%            $58,150

31%            $121,300

36%            $263,750

39.60%      >$263750

The consumer price index comparing 1996 dollars to 2014 dollars is 1.48. Translating the 1996 tax brackets, then, into 2014 dollars, and the tax brackets under the 1996 law would look this way today:

Tax rate      Income up to in 2014 dollars

15%            $35,520

28%            $86,062

31%            $179,524

36%            $390,350

39.60%      >$390350

The federal income tax brackets applicable in 2014 look this way:

Tax rate    Income up to in 2014 dollars

10%          $18,150

15%           $73,800

25%          $148,850

28%           $226,850

33%           $405,100

35%           $457,600

39.60%      >$457600

Using these tables, one can calculate the amount of tax paid by each household for specified income levels, under first the 1996 tax table, and then the 2014 tax table. Median household income is slightly in excess of $50,000. http://en.wikipedia.org/wiki/Household_income_in_the_United_States Under the change in tax law, middle income households do get a break. But upper income households also get a break:

$50,000            $9,382    $5,385 

$150,000          $28,632  $29,247

$350,000          $62,979   $68,948

$500,000         $167,772  $144,753

At $50,000 of taxable income, the amount of tax payable has gone down since 1996. At $150,000 and $350,000 taxable income, the amount of tax has increased slightly. However, at $500,000 taxable income, the payable tax has gone down by almost 14%.

Based on 2011 tax returns, there were over 1.3 million households filing tax returns with adjusted gross income just under $400,000. http://taxfoundation.org/article/summary-latest-federal-income-tax-data For purposes of estimating, assume there were 1,000,000 households with adjusted gross income over $500,000. Each of these households paid $23,000 less in tax under the 2014 tax brackets than under the 1996 tax brackets. Of course, this assumes that the earners in the higest brackets earned exactly $500,000 in taxable income. Obviously, there are a number who earned substantially more than that, making the foregoing calculation an underestimate.

That means under the federal tax brackets in effect in 2014, the US Treasury collected $23 BILLION less in tax than they would have under the brackets in effect in 1996. This is no small change.

Shouldn’t Congress adjust the tax brackets, even though they can keep the tax rates the same?