The Fiscal Cliff deal has made calculating tax brackets so difficult that David Sloan, Senior-Editor-At-Large at CNN Money, couldn’t do it himself. He had to consult not only a accountant, but also a fellow at the Tax Policy Center. That’s how complicated things have gotten in our tax code. What exactly has changed? He continues:
I emailed Roberton Williams, the Tax Policy Center’s Sol Price fellow, to make sure that this time, I got my numbers and definitions right…
…”Two issues have confused people about this one,” he wrote me. The first, he said, is that the other tax increases on high-income people (the ObamaCare taxes and the phaseouts of personal exemptions and itemized deductions) affected taxpayers based on their adjusted gross income, not on their taxable income.
The second source of confusion, he said, was that Obama’s proposals to raise taxes only on single people with adjusted gross income above $200,000 and married couples above $250,000 “made it difficult for him to propose tax brackets.” That’s because filers with the same adjusted gross income can have widely differing exemptions and deductions, resulting in widely differing taxable incomes.
As long as he was in the neighborhood, Williams pointed out an anomaly that I’d like to pass along. Because of the way these various pieces of legislation intersect, there is now a bizarrely-narrow 35% federal bracket for single filers: $398,350 to $400,000 of taxable income. By contrast, the 33% bracket is wide: from $183,250 to $398, 350. (See all the new brackets for yourself here.)
So the key difference is between taxable income and adjusted gross income:
There is, in fact, a very large difference between adjusted gross income and taxable income. Taxable income consists of adjusted gross income less personal exemptions less deductions. This means that far fewer people are affected by the cliff-avoiding hike than if adjusted gross income had been the metric.
I hope all of this confused you as much as it did me (and an editor of CNN Money for that matter). I’d also like to point out that President Obama’s tax increases on the rich was purely a political maneuver. I was not meant to shore up our nation’s finances, it was meant to create a rift in the otherwise unified Republican opposition. If Obama was interested in generating revenue he would have insisted on eliminating deductions for all taxpayers over $250,000 instead.
I have written before that conservatives can find new life by reducing complexity in government. Here is another perfect example where they can shine. President Obama indicated in his inaugural speech that he’ll pursue tax reforms. Not tax cuts or increases: reform.