Will 'Watchdog' Media Report on Obama's Stealth Tax Hike?

May 23rd, 2011 1:49 PM

New facts released by the office of House Budget Chairman Paul Ryan, R-Wis., reveal a hidden tax increase in President Obama's budget proposal. Obama's plan would, these facts demonstrate, impose a 20 percent increase in the top income tax rate - a significantly greater increase than the president has admitted.

The news media fancies itself a watchdog, so if the president is going to dramatically hike taxes, one would hope that Americans would hear about it first. But thus far, there has been almost no coverage of these stealth tax hikes. On Monday, Washington Post fact-checker Greg Kessler confirmed the veracity of Ryan's claims. Whether other major media outlets report on them will be the true test.

Congressman Ryan broke down the president's proposed tax hikes into a pair of separate measures that effectively increase the top tax rate. Taken with an existing Medicare payroll tax, the new top tax rate under Obama's plan would be 44.8 percent, not the 39.6 percent the administration claims - and significantly higher than current top tax rates.

The first provision of Obama's budget that Ryan's office noted is the reinstatement of so-called "PEP and Pease" provisions, which refer to two laws that limited deductions for high-income taxpayers. Kessler reported Monday:

Ryan calculates that reinstating “PEP and Pease” would add about 2 percentage points to a wealthy person’s tax rate. The precise calculation can vary, but Ryan’s estimate appears to be in the ballpark.

Ryan then adds Medicare payroll taxes to his total rate. Unlike Social Security, there is no wage cap on Medicare taxes. Currently, employees and employers split the cost of the 2.9 percent Medicare tax, though many economists say it makes sense to assume some of the employer’s tax payments result in lost wages for the employee. Ryan does that to come up with a “net” tax rate of 2.3 percent. (However, we should note, this is an existing tax; it is not new under Obama.)

Interestingly, when some conservatives complain that half of all Americans do not pay income taxes, they are not counting payroll taxes, which is the main tax paid by lower-income Americans. We have not seen Ryan make this claim; it certainly would be inconsistent for him to count payroll taxes here and not in other circumstances.

Meanwhile, starting in 2013, the new health care law adds a surtax on high earners — an additional 0.9 percent tax on incomes over $200,000 for individuals and $250,000 for couples filing joint returns.

For someone making $390,050, thus triggering the 39.6 percent tax rate, that means at least an extra $12,600 in Medicare taxes just from the health care law. (The health care law also imposes additional taxes on investment income, but we won’t get into that now.)

Adding up all of these figures, you get to an effective marginal rate of nearly 45 percent. One can quibble with some of the assumptions, but tax experts we checked with found Ryan’s calculations to be reasonable.

The two percent income tax increase from PEP/Pease and the 0.9 percent "surtax" imposed to pay for Obamacare, when taken with the 2.3 percent payroll tax increase, bring the new top tax rate to 44.8 percent.

The hidden tax hikes in Obama's budget amount to a 7.5 percent increase in income taxes for top earners - a 20 percent increase over current rates. The new top tax rate under Obama's budget would be the highest it's been since the 1980s, and significantly higher than the president himself has admitted.

The revelations are crucial as a means to evaluate the administration's performance on the number one policy priority of American voter: jobs. Raising tax rates on the highest income earners can depress job growth, as the wealthiest Americans are generally the ones investing in job-creating ventures. So a push to so dramatically increase taxes on those earners is anathema to a job-creating economic agenda.

The president himself has criticized the business community for supposedly sitting on $2 trillion in capital (a claim that was itself misleading). But Obama apparently expects investors to risk what capital they have without knowing whether they will face punitive tax rates in the near future. So the "uncertainty factor" of these stealth tax hikes, which would raise rates even higher than the roughly 40 percent claimed by the White House, undermines the president's own rhetoric on job creation.

Not only is this tax increase likely to hinder job creation, it is unlikely to meaningfully contribute to deficit reduction, for reasons detailed in this video, compliments of Learn Liberty:

So the president's stealth tax increase will not likely aid in efforts to address the electorate's top priority, or its own stated goal of bringing down the federal budget deficit. Will the media report on these tax hikes now that they have been unearthed, or simply accept the president's claims at face value? The Washington Post has admirably taken the lead. Let's hope that others follow.