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July 26, 2012


Brendan's observations are fine, as far as they go. However, the Bush tax cuts involved a lot more than just the rates at various brackets.

The Bush tax cuts included a reduction across the board for long-term capital gains and dividends. The legislation also made dozens of other changes and adjustments to the tax code, involving exemptions, deductions, the marriage penalty, the child tax credit, the phase out of the personal exemption, etc.

In particular, I believe the revised rates on dividends and long-term capital gains had a big impact. I suspect that the Dem proposal undoes Bush's reduction of these rates. If so, many of wealthy could pay higher taxes under the Dem proposal. The reduction in tax on their first $250,000 of income could be offset by higher rates on their dividends and capital gains

To properly analyze the Democratic and Republican bills, one must take into account how they handle these dozens of issues. Do these two bills leave the changes in place? Or, do they revert to the law prior to the Bush tax cuts? And, once one finds out how these changes are handled, one must analyze the tax impact of the various items.

Unfortunately, a media that can't even explain the meaning of a tax bracket cannot be expected to analyze all these other changes.

More details from the LA Times:

Under a White House proposal approved this week in the Senate, tax rates would rise on singles earning $200,000 or more a year, and on married couples earning $250,000 or more — the top 2% of earners.

Those earning above the threshold would also see their tax rates on capital gains and dividends rise to 20%, rather than the current 15%. The estate tax would increase to 55%, from 35%, with the first $1 million of inheritance exempted from tax.

Apparently there would be two different rates on capital gains and dividends, depending on whether one's total earnings were above or below the threshhold. If that's correct, then a taxpayer with substantial capital gains and dividends could wind up with less income net of taxes if he earned slightly more than the threshhold, rather than slightly less.

Not true - see NYT: "The rate on most dividends and capital gains would rise to 20 percent from 15 percent for income over $250,000." 

Link here: http://www.nytimes.com/2012/07/26/us/politics/senate-passes-tax-measure-with-election-in-mind.html

Thanks for the info and the link, Brendan. I find the sentence you quoted somewhat unclear. It seems to have some words missing. I see at least two possible meanings:

A. The rate on most dividends and capital gains would rise to 20 percent from 15 percent for filers on the portion of dividend and capital gain income over $250,000.

B. The rate on most dividends and capital gains would rise to 20 percent from 15 percent for married filers with total income over $250,000 and for single filers with total income over $200,000.

Alternative (B) was pretty much my guess based on the LA Times story. However, the Times use of the word "most" seems to imply that there may be aspects that I don't understand. Or, maybe by "most filers", they just meant those filing joint returns. Brendan, commenters -- do you have other plausible interpretations that I'm overlooking?

Nancy Pelosi famously said, "We have to pass the health care bill so that you can find out what is in it.". I suppose the same applies to this bill. I wonder how many of the Senators who voted for this bill know the proper interpretation of Brendan's quoted sentence.

JCT analysis confirms 20% is the top rate on capitol gains, not the rate on all capital gains income: https://www.jct.gov/publications.html?func=startdown&id=4477

Also see bill text: http://www.gpo.gov/fdsys/pkg/BILLS-112s3412es/pdf/BILLS-112s3412es.pdf

Thanks again, Brendan, for these two links. I confess I'm still unsure. Consider an example:

If a single taxpayer earned $150,000, including $100 of capital gains and dividends, I think it's clear that his tax on the CG&D would be $15. He gets the lower rate because his income was below the $200,000 threshhold.

But, suppose he earned $400,000, including $100 of CG&D. Would the tax on his CG&D be:

A. $20. He pays the full 20% on his entire CG&D

B. $17.5. He pays the average of the 15% and 20% rates because half his income was below the threshhold and half was above.

C. Some other amount.

No doubt the actual wording of the law that Brendan linked to must supply the answer, but I couldn't decipher it.

My understanding is that CG&D would be taxed at 20% to the extent that they exceed the upper income threshold - either by themselves or when combined with other ordinary income.

Example - if an individual reported earned income after deductions of $175,000 their tax on that amount would be the same as under current tax law.

Suppose that they also currently had an additional $50,000 of CG&D. This additional income would be taxed at 15% currently.

Under the proposed law I believe that the tax rate on the CG&D would be 15% on the first $25,000 (of CG&D) and then 20% on the next $25,000 (of CG&D).

The tax on CG&D is already set-up in this way currently for some tax payers who might have some CG&D taxed at zero percent while another portion of their CG&D (that pushes their total income over a certain threshold) is taxed at the 15% level.

CG&D would still be preferential items. So a person with AGI of $225,000 (of which %50,000 is CG&D) would not be in a higher tax bracket with respect to their earned income of $175,000.

The $200,000 threshold comes into play (in this type of situation) only for calculating the tax rate on the CG&D themselves. The combined income increases the tax on part of the CG&D but it doesn't impact their other income.

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