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Love, marriage, and taxes.

Candidate Clinton promised a middle-class tax cut. Pres. Clinton has negated his original offer and proposed a middle-class tax increase in the form of an energy tax. Tax revenues always have come from the middle class and always will. While the income of the "rich" may be substantial, they are too few to pay the nation's bills.

Nevertheless, pay they will. Taxpayers in the top bracket will see their rates soar from 31% to 36%. That's just for taxpayers with an adjusted gross income of more than $115,000 and couples with a gross income in excess of $140,000. As a result, this tax will hit only about 1.5% of the population.

However, that group will be hit hard. On top of the five percent increase, there is a proposed 10% surcharge on incomes exceeding $250,000 that will add another 3.6% to the top bracket. Both of these taxes are slated to be retroactive on income earned since Jan. 1, 1993.

Beginning in January, 1994, the same people will find themselves paying another 1.45% on any gross income over $135,000 in the form of Medicare payroll tax increases. Moreover, the alternative minimum tax is scheduled to increase as well. Even before they begin paying their share of increased energy and corporate taxes, the top 1.5% of the taxpaying population will be hit for an additional 10% more in taxes.

The marriage penalty

The President's plan, therefore, appears to be extremely progressive. The proposed tax package also magnifies the marriage penalty for wealthier two-income couples. For instance, the new 36% marginal tax rate applies to married couples after their taxable income reaches $140,000, but for single individuals starts at $115,000. What this means is that two unmarried people could have a combined taxable income of $230,000 before they both jump to the 36% bracket from 31%. A married couple with the same $230,000 of combined income would pay $4,500 more in income tax than if they were single.

Moreover, the proposed tax law change also would impose a 10% surtax on regular taxable income over $250,000 for both individuals and married taxpayers. As a result, if two individuals with incomes of $150,000 each married, they would pay a surtax on $50,000 of their combined $300,000 income. Yet, two single taxpayers living together each could have an income of $250,000-for a combined total of $500,000 - without becoming subject to the tax.

Let's look at an example of the magnitude of the changes. Two individuals with incomes of $140,000 each would pay $1,250 more under the proposed tax plan than they would under the current law. That adds a combined total of $2,500 in additional tax. If they married, they would owe $7,925 (including the surcharge) more than under current law. This creates an increased marriage penalty of $5,425 more than if they remained single.

In addition, the Clinton tax plan significantly affects high-income earners with respect to Social Security. Taxpayers on Social Security with incomes exceeding $32,000 for a couple and $25,000 for an individual would be taxed on 85% of their Social Security benefits - up from 50% currently. Approximately 20% of all Social Security recipients earn enough to be subject to this increased tax.

The tax increases above are just the beginning. The President's proposal also seeks to extend the itemized deductions limitation and personal exemption phaseout that was scheduled to expire for 1996 and 1997, respectively. These changes will affect how high-income earners live and how they invest.

Attractive investments

The higher marginal rates should enhance the attractiveness of tax-exempt investments, such as municipal bonds, and tax deferred investments, such as annuities and whole life insurance. Moreover, stocks should become more attractive than taxable bonds and many other income-producing investments. This is because the spread between the capital gains rate, currently 28% and not scheduled for an increase, and the top marginal rate on ordinary income, going up to 39.6% and higher, would widen considerably. Moreover, the proposed surtax would not be applicable to capital gains.

While the focus of this column has been to analyze the negatives of the President's tax proposal, we must express a sincere sympathy for his objectives. With respect to deficit reduction, he is absolutely correct. Unless the magnitude of the growing deficit is reduced, Americans' bequest to their children will be a financial straight jacket. The deficit must be reduced. However, the government is focusing on revenue increases, rather than expenditure decreases. Whereas Clinton promised to cut $1.00 in spending for every $1.00 in additional taxes, he did not. By 1998, the Clinton plan would raise almost $2.00 in new taxes for every $1.00 in spending cuts. Moreover, his proposed cuts in the Federal deficit ($473,000,000,000) actually are lower than those George Bush negotiated in 1990 ($482,000,000,000). Again, rhetoric has overshadowed reality. The President has taken the first step, but Congress must have the political courage to follow through with additional cuts.

Remember, taxpayers, there is more to come. Clinton still has to pay for health care reform. White House officials have said that it could cost $30-90,000,000,000 annually to finance the President's goal of extending "affordable high quality" health care to all Americans. That means still more "revenue enhancers" will be proposed.
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Title Annotation:Pres. Clinton's tax proposals
Author:Schnepper, Jeff A.; Leduc, Bob
Publication:USA Today (Magazine)
Article Type:Column
Date:Jul 1, 1993
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