More money, more problems: Obama whacks the wealthy

Wealthy US citizens find themselves at the centre of Barack Obama's tax agenda, but will his policies have any effect on their spending habits?

This week, many Americans were left with that anxious feeling that often hits the pits of Australian stomachs in October -- tax statements need to be filed by April 15.

The Internal Revenue Service reports that more than 20 per cent of Americans wait until the last week to file their taxes.

The Tax Policy Center says these are usually the people who are not expecting a return.  It makes sense, right? It is hard to imagine many people writing a cheque out to the government until they have to.

Interestingly though, those Johnny-come-latelies are often the wealthy.

A recent report by the Congressional Budget Office found that if your salary is among the top 20 per cent of Americans, you pay 93 per cent of all federal income taxes. (That total figure is about $US1.1 trillion a year, give or take a billion.)

When you broaden that to the top 40 per cent of income earners, the CBO found that those Americans pay 106 per cent of all income taxes.

Confused?

It is basically because many wage earners below that threshold will receive a refund on their federal taxes. That is not to say that the taxman doesn’t get his pound of flesh from lower income earners in other ways -- payroll taxes, state income taxes, sales taxes, property taxes, excise taxes. Needless to say they are paying a generous pound.

But 2013 was not a great year for the ultra-rich either. JR Ewing died, the Caribbean experienced lots of unseasonal storms and they are paying more tax than ever.

Last year, the American Taxpayer Relief Act extended George W. Bush's tax cuts for most Americans, but restored higher pre-Bush taxes for high-income households.

The top tax rate reverted to 39.6 per cent for taxable income over $US400,000 for singles and $US450,000 for couples. In addition, personal tax exemptions began to be phased out, as did limits on itemised deductions for those singles earning over $US250,000.

On top of that, the Patient Protection and Affordable Care Act (aka Obamacare) created two new taxes for the rich, which will come up for the first time on their 2013 tax filings.

There is the Net Investment Income Tax which adds an additional 3.8 per cent income tax on things like dividends, capital gains, interest, and other investment income. Then there is the Additional Medicare Tax, which adds a 0.9 per cent tax on wage, salary, and self-employment income. These taxes kick in when singles earn about $US200,000 and the collective income of couples sails past $US250,000.

But there could well be more. US President Barack Obama has put a millionaires’ tax on his to-do list, which would set a 30 per cent minimum tax for millionaires.

If the so-called Buffett Rule was enacted, it would generate $US36.7 billion a year, according to the Tax Foundation, a conservative think-tank.

Those number crunchers at the Tax Policy Centee say that for 2013, families with incomes in the top 20 per cent will pay an average of 27.2 per cent of their income in federal taxes. The top 1 per cent of households, those with incomes averaging $US1.4m, will pay an average of 35.5 per cent.

It says that the after-tax income for top earners will fall by slightly more than 3 per cent.

Don’t get me wrong, this isn’t a column defending the poor rich. But with all the extra taxes aimed squarely in their direction coming due it will be interesting to see whether it causes this group to tighten their Louis Vuitton belts and spend less, or if they notice it at all.

One silver lining for those caught up in Obama’s class warfare agenda is that they may still be eligible for some weird and wacky deductions that have crept into America’s tax rules over the years.

For example, if you are rich and live in Kansas then simply untether your hot-air balloon and you won’t be taxed. You can claim it as a legitimate form of transportation.

If you are wealthy and from South Carolina, you can claim deductions for clarinet lessons (apparently it helps correct overbites for those not wanting to pay for expensive dental procedures) and that state will actually pay you for each deer carcass you donate.

If you live in Connecticut, you may be happy to hear that adult nappies do not carry a sales tax. However, if you try and squeeze into the kids’ ones, then you will be slugged.

Just trying to help.

Mathew Murphy is a Walkley Award-winning journalist based in New York.

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