Thursday, December 13, 2012

Adjusting 1993 OBRA tax rates for inflation, ctd

Earlier I commented on simply adjusting the 1993 Omnibus Budget Reconciliation Act tax rates (these are the so-called Clinton tax rates) for inflation and otherwise letting the Bush tax cuts expire.

I freely admit that not only do I have no tax expertise, I'm pretty ignorant on the whole subject. 

Following that earlier post, I spoke to an actual tax accountant and he confirmed that if the Bush tax cuts expired, tax rates would automatically go back to those of 1993 adjusted for inflation to 2012 or 2013 dollars. I've also learned that indexing tax rates to inflation was one of Ronald Reagan's actions in reforming the tax code.

So, if we cross the fiscal cliff and the House simply refuses to yield, tax rates for tax year 2013 (married filing jointly) would look approximately like this:

$0 to $59,000: 15%
$59,001 to $143,000: 28%
$143,001 to $224,000: 31%
$224,001 to $400,000: 36%
$400,000 + : 39.6%

I say approximately because I used the inflation calculator from the Bureau of Labor Statistics, but I have no idea how the IRS would actually index the rates.

And remember, these tax rates apply to Adjusted Gross Income (AGI)  which is your net income after all deductions.  Remember also that our tax system is progressive such that your actual tax paid may be calculated on multiple tax rates.  The first $59,000 dollar of AGI would be taxed at 15%, the next $84,000 of AGI would be taxed at 28%, etc.   People who should no better often assume that if you had $143,001 of AGI that all income would be taxed at 31% and that is simply not the case.

Finally, as I've said before, crossing the fiscal cliff provides a great opportunity to really get our fiscal house in order.  If not now, when could we ever get back to more sensible tax rates AND cut $1 trillion dollars from the defense budget? 

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