Wednesday, December 05, 2012

Adjusting OBRA 1993 tax rates for inflation

The Omnibus Budget Reconciliation Act of 1993 raised income tax rates on those with the top 1.2% of income earners.  These are the so-called Clinton rates currently being discussed.

President Obama and most of the Country wants to restore the top individual income tax rate under the 1993 OBRA while retaining the so-called Bush tax cuts for everyone else.

If the House of Representatives does nothing, the Bush tax cuts of 2001 and 2003 expire at midnight, December 31, 2012, and we return to the 1993 rates.  

OBRA imposed an income tax rate of 39.6% on household adjusted gross income or taxable income (much less than actual income) above $250,000.   But the OBRA adjusted the top income amount for inflation such that the income threshold for the top rate rose every year starting in 1995*.

Obviously, $250,000 in 1993 was much more income than it is in 2013.   In fact, using the Bureau of Labor Statistics Inflation calculator, $250k in 1993 is equivalent to $400k today.

Adjusting the 1993 income threshold to 2013 dollars seems like an easy concession that everyone could agree on.  This is essentially what Warren Buffett suggested (among other things) in his November 25th NY Times OP/ED. Buffett said the threshold should be $500k and that works for me too.  The issue is tax fairness and fairness requires we compare apples to apples. 

Personally, I'd favor a return to all the tax rates of 1993 adjusted for inflation to 2012 dollars.  If we did this, the tax rates on adjusted gross income (married filing jointly) would look 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%

If the House passes the Senate bill extending all Bush tax cuts except the top rate, the tax rates would look like this:

$0 to $17,000: 10%
$17,001 to $69,000: 15%
$69,001 to $139,350: 25%
$139,351 to $212,300: 28%
$212,301 to $250,000: 33%
$250,000+ : 39.6%

*Here is a question for which I could not find an answer.  We know that on December 31, all the Bush tax cuts expire and rates revert to the 1993 OBRA.  When I looked at tax tables, I saw that the tax rates from year to year from 1995 to 2001were adjusted for inflation.  So, if we revert to 1993 OBRA, why wouldn't all the rates including the top rate automatically be adjusted for inflation, as they were in 2001, and apparently would have if the Bush tax cuts were never passed? 


Ed Redmond said...

It's certainly not gospel, but my tax planning software assumes that the brackets will just be the 2012 amounts, adjusted for inflation.

Don said...

So the software assumes all Bush tax cuts will be extended through 2013?

That makes sense, as any other assumption would require a great deal of guessing.

Ed Redmond said...

No, it actually shows them expiring, but the taxable income brackets are based on 2012. It's a terrible mess.

Don said...

It's a terrible mess that is strangling the live out of the U.S. economy.