Tax VOX

A staff member keeps the entry curtain closed before President Barack Obama takes the stage to speak at a campaign rally in Tampa, Florida Thursday. Gleckman offers an explanation of President Obama's tax plan. (Kevin Lamarque/Reuters)

What is President Obama's tax plan?

By Howard Gleckman, Guest blogger / 10.25.12

After all the promises and finger-pointing, the presidential campaign is nearly over. But since the race has shed more heat than light on how each of the candidates would govern, I thought it would be useful to describe exactly what Barack Obama and Mitt Romney have pledged to do on tax policy if elected on Nov. 6.  I’ll describe Romney’s agenda next week but to start, here is Obama’s:

The elevator speech: Obama would retain the current individual income tax system, but raise taxes on high-income households to help reduce the budget deficit.  He’d lower corporate tax rates but make it harder for multinationals to avoid U.S. tax on their foreign income.

Obama has had relatively little new to say on taxes through the campaign, with nearly all of his agenda described in the 2013 budget he released last February. ( Continue… )

Tax payers search through tax forms at the Illinois Department of Revenue in Springfield, Ill., in this April 2010 file photo. As the nation approaches a fiscal cliff, the future of the Child Tax Credit is in question, Maag writes. (Seth Perlman/AP/File)

Protecting the Child Tax Credit as fiscal cliff looms near

By Elaine Maag, Guest blogger / 10.25.12

The Child Tax Credit (CTC), a key piece of the safety net for low- and moderate-income families, is in jeopardy as the nation hurtles towards the fiscal cliff. Not only could the 2001 expansion of the credit die, but so could provisions in the 2009 stimulus that made the credit much more available to low-income families.

My biggest fear is that Congress will cut a year-end deal that extends the 2001 expansion but lets the important 2009 changes die.

To explain what’s happening, here is a bit of history: Prior to 2001, the credit was $500 per child. Families whose credit exceeded the income tax they owed could get the balance as a refundable credit only if they had at least three children and paid enough payroll tax. The credit phased out for single parents with income over $75,000 and married couples with income over $110,000.

The 2001 act doubled the credit to $1,000 per child and broadened its refundability. Families could receive 15 cents of their credit for each dollar of earnings over $10,000. (The threshold was indexed for inflation and would be about $13,000 in 2013.) Stimulus legislation in 2008 and 2009 reduced the threshold to $8,500 and then to $3,000. The more generous refundability level enacted in 2009 is critically important for low-income families.

Of the $38.3 billion in total child credits that TPC estimates families will claim this year, $29.5 billion comes from the 2001 tax law and another $8.8 billion from the 2009 stimulus. Most of the 2001 increase will go to families in the middle income quintile and higher (see chart). Families with the lowest incomes will get less than 3 percent of the 2001 increase. In contrast, fully 60 percent of the benefits from the 2009 changes will go to families in the lowest income quintile.

As we near the fiscal cliff, Congress should keep in mind the entire package of CTC changes, noting that the 2009 ARRA changes matter most for very low-income families.

President Barack Obama and Republican presidential nominee Mitt Romney meet family members after the third presidential debate at Lynn University, Monday. Gleckman offers 10 key differences between the Obama and Romney tax plans. (Michael Reynolds/Pool/AP)

The 10 biggest differences between the Romney and Obama tax plans

By Howard Gleckman, Guest blogger / 10.24.12

When it comes to taxes, Mitt Romney and Barack Obama are almost perfect mirror images of one another. Here are ten ways their tax plans are different.

1. Romney’s tax agenda is ambitious and opaque. Obama’s is modest but relatively transparent.
2. Obama has shown little interest in broad-based tax reform. Romney wants to fundamentally rewrite the revenue code.
3. Romney wants to cut tax rates across the board. Obama wants to raise rates for high-income households.
4. Obama wants to hike taxes on the wealthy. Romney does not.
5. Obama believes that tax increases on high-income households are a key piece of deficit reduction. Romney would not use even a penny of new revenues to help shrink the deficit.
6. Romney believes that low tax rates will generate enough economic growth to jumpstart the economy. Obama does not.
7. Obama would preserve tax preferences for green energy. Romney would eliminate them.
8. Romney wants to cut taxes on investment income. Obama would raise them.
9. Obama would extend the 2009 expansion of tax credits for low- and moderate-income families.  Romney would let them expire.
10. Romney would shift the corporate tax to a territorial system in which domestic firms owe no U.S. income tax on their overseas sales but foreign firms pay U.S. tax on money they make here. Obama would continue to impose U.S. tax on foreign earnings of domestic firms, and make it tougher for those companies to avoid tax by keeping their profits overseas.

The two men do have a few things in common. Both want to cut the corporate tax rate, though Romney would cut it more. Romney would permanently extend all of the 2001-2003 tax cuts while Obama would continue nearly all of them. Both men would let the 2010 payroll tax reduction expire as scheduled in January. And both apparently believe that households making up to $200,000 or $250,000 are middle-income.

But those differences are small compared to the candidates’ vastly different visions of what the revenue code should look like.  On taxes, at least, voters have an important choice to make in a couple of weeks.

Republican presidential candidate, former Massachusetts Gov. Mitt Romney talks with campaign trip director Charlie Pearce, second from right, after boarding his campaign plane in Sterling, Va., Thursday. Romney's campaign has gotten defensive about the results of a new Tax Policy Center report, accusing the center of being “misleading and deceitful," Gleckman writes. (Charles Dharapak/AP)

The real lesson about capping itemized deductions

By Howard Gleckman, Guest blogger / 10.18.12

The Tax Policy Center is back in the political cauldron, this time in the wake of its new research that looks at the revenue and distributional effects of caps on itemized deductions.

TPC’s aim was to analyze an interesting idea that could find its way into future tax reform plans. Its conclusion was a mix of good and bad news. The good: Such a cap is a highly progressive way to raise substantial revenues. The bad: Even eliminating all itemized deductions cannot raise enough money to pay for a tax reform that significantly cuts rates without adding to the budget deficit.  

But, alas, we are in the midst of a contentious political season. And because Mitt Romney has at least three times in the past few weeks raised the possibility of such a deduction cap, his campaign has gotten defensive about TPC’s results, accusing the center of, among other things, being “misleading and deceitful.”

This is, to say the least, odd, since TPC’s findings provide evidence that a deduction cap is a pretty good, though insufficient, idea.   

Let’s all take a deep breath here. TPC did not try to analyze Romney’s plan (since he won’t tell anybody what it is, we can hardly model it). Rather, our analysis applies far more broadly to any tax reform. And the real message is this: Doing reform that significantly reduces rates without adding to the budget deficit requires lawmakers to curb more than itemized deductions. If you want to substantially reduce rates, going after popular tax breaks such as deductions for mortgage interest, charitable gifts, and state and local taxes, is only the beginning.

Reformers also have to look at other tax preferences that are ingrained in economic behavior, such as the exclusions for employer-sponsored health insurance and municipal bond interest, tax subsidies for retirement savings, and the low rates on capital gains and dividends.

This is hardly an earth-shattering insight. After all, it is what the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson, did in 2010. It is also what the Bipartisan Policy Center’s fiscal tax force, chaired by former GOP senator Pete Domenici and former Clinton budget director Alice Rivlin, concluded two years ago. TPC has been telling the same story through a series of research papers since last summer.

Here’s where things get complicated for reformers. A cap on deductions has three big advantages. It is a very progressive way to raise new revenues. It is administratively relatively simple (through not without its problems). And it is politically attractive since it avoids having to tackle individual tax preferences—each with its own powerful constituency—one at a time.

But if the deduction limit doesn’t raise enough money, lawmakers would have to reach into other tax preferences to pay for big rate reductions. And many of them, such as the exclusion for employer-sponsored health insurance and tax incentives for retirement savings, disproportionately benefit the middle-class.

Curbing them would make it much harder to maintain progressivity than just capping deductions does. A cap on exclusions is lots more complicated. In addition, curbing middle-class savings incentives at least may not be the smartest long-term economic policy.  

That brings us to tax preferences for capital gains. Raising the rate on gains could generate substantial revenue in a very progressive way. Indeed, both Bowles-Simpson and Rivlin-Domenici chose to tax gains at ordinary income rates (though those rates were substantially lower than today rates).

And that, in the end, may be the real story here. Lawmakers may find that the road to substantially cutting rates without adding to the deficit may inevitably lead through the capital gains tax. If they don’t want to mess with capital gains, they may have no choice but to scale back their ambitions when it comes to rate reductions. And that applies whether you are Mitt Romney or anybody else.    

Republican presidential candidate, former Massachusetts Gov. Mitt Romney is greeted as he steps off his campaign plane in Ronkonkoma, N.Y., Tuesday as he arrived for his debate against President Barack Obama. In the debate, Mr. Romney repeated the idea that he could pay for much or all of the 20 percent rate reduction and other tax cuts in his tax plan by capping itemized deductions at $25,000. (Charles Dharapak/AP)

How much revenue would a cap on itemized deductions raise?

By Roberton Williams, Guest blogger / 10.18.12

In last night’s debate, Mitt Romney repeated the idea that he could pay for much or all of the 20 percent rate reduction and other tax cuts in his tax plan by capping itemized deductions at $25,000. He had previously suggested a $17,000 cap in an interview and, in the first debate, $25,000 or $50,000 caps—and possibly phasing deductions out entirely for high-income taxpayers. Capping deductions would raise revenue in a highly progressive way but how much revenue and how progressive depend on the cap.

Itemized deductions disproportionately benefit high-income taxpayers for three reasons:

1. High-income taxpayers are more likely to itemize deductions. Less than 10 percent of those in the bottom two income quintiles (fifths) itemized in 2011, compared with about 80 percent of those in the top quintile and more than 95 percent of those in the top 1 percent.
2. High-income taxpayers claim more itemized deductions. Itemizers in the bottom two quintiles averaged less than $14,000 in 2011, compared with nearly $38,000 for those in the top quintile and more than $170,000 for the top 1 percent. A higher cap on deductions would therefore affect fewer taxpayers and a larger share of affected taxpayers would have very high incomes.
3. A dollar’s worth of deductions reduces taxes more for high-income taxpayers. That dollar saves 35 cents for someone in the top 35 percent tax bracket but only 15 cents for a person in the 15 percent bracket.

As a result, more than 80 percent of the tax savings from itemized deductions in 2011 went to those in the top quintile and more than a quarter to the top 1 percent. Paring back those deductions would hit high-income taxpayers hardest.

To get a sense of how much money we could raise by capping tax deductions, my TPC colleagues have analyzed the resulting revenue gains and distributional impacts of four ways to limit itemized deductions—eliminating them entirely and capping them at $17,000, $25,000, or $50,000—calculated against three benchmarks (current law, current policy, and current policy with 20 percent lower rates and elimination of the AMT). As usual, the current law baseline has all expiring tax cuts actually expiring, while the current policy baseline has almost all of them  permanently extended.

Eliminating all itemized deductions would yield about $2 trillion of additional revenue over ten years if we cut all rates by 20 percent and eliminate the AMT. Capping deductions would generate less additional revenue, and the higher the cap, the smaller the gain. Limiting deductions to $17,000 would increase revenues by nearly $1.7 trillion over ten years. A $25,000 cap would yield roughly $1.3 trillion and a $50,000 cap would raise only about $760 billion.

But higher caps would impose proportionally more of the tax increase on higher-income households, as new TPC estimates show. With tax rates 20 percent below today’s rates, about 83 percent of the revenue gain in 2015 from a $17,000 cap would fall on the top quintile and about 40 percent on the top 1 percent. Raising the cap to $25,000 would boost those shares to nearly 90 percent on the top quintile and fully half on the top 1 percent. A $50,000 cap would virtually exempt the bottom four quintiles from higher taxes: less than 4 percent of the tax increase would fall on them, while nearly 80 percent would hit the top 1 percent. (Phasing down the caps at high-income levels would, of course, concentrate the revenue gains even more at the high end, but how much would depend on the details.)

Suggesting limits on deductions was Governor Romney’s first public statement about how he might offset the revenue lost by cutting tax rates. Without more specifics, we can’t say how much revenue such limits would actually raise. But these new estimates suggest that Romney will need to do much more than capping itemized deductions to pay for the roughly $5 trillion in rate cuts and other tax benefits he has proposed.

In this April 2011 file photo, Max Martinez, dressed as the Statue of Liberty, tries to alert motorists on the final day to file taxes. (Tony Dejak/AP/File)

What the Joint Tax Committee really said about tax reform

By Howard Gleckman, Guest blogger / 10.15.12

On Friday, congressional Democrats released the results of a new analysis of base-broadening, rate-cutting tax reform by the Joint Committee on Taxation. For reformers everywhere the results seemed exceedingly grim: By eliminating all deductions, Congress could reduce tax rates by only a puny 4 percent without adding to the deficit. The top tax rate, for instance, would drop from 39.6 percent to just 38.2 percent.

In other words, if JCT is right, lawmakers would have to take the political heat for going after popular deductions such as those for mortgage interest or charitable giving and they best they’d have to show for their pain would be a tiny reduction in rates.

These estimates of what would happen under one theoretical tax rewrite sent reformers, not to mention the Romney campaign, into a frenzy. How could Romney pay for his 20 percent across-the-board rate cut if JCT could only get rates down by 4 percent?  How could the bipartisan fiscal plans we’ve seen over the past couple of years both lower rates and cut the deficit if eliminating tax expenditures generates so little money? Even my colleagues at the Tax Policy Center, who have estimated much larger effects of broadening the tax base, would be very wrong.

The JCT estimates matter because, unlike all those other groups, including TPC, the Joint Committee is the official congressional arbiter of tax proposals. If JCT says your tax plan doesn’t generate enough money to pay for the rate cuts you want, it doesn’t. End of story.

But a close look at what JCT did tells a somewhat different tale, and gives reformers some much needed oxygen.  The congressional staffers got these results because they took a very narrow view of base-broadening, and because they started from a different (though not surprising) place. The JCT:

• Starts with a “current law” baseline. Thus it assumes most of the tax cuts enacted over the past decade have expired. Thus, for instance, rates are back up to where they were in 2000 and the Alternative Minimum Tax is no longer patched, thus hitting millions of middle- and upper-middle income households. By contrast, many other tax rewrites assume today’s tax law is made permanent prior to reform, which allows them to dedicate more dollars to rate reduction.
• Repeals the AMT and limits on itemized deductions and personal exemptions for high-income households. This alone eats up over $1 trillion.
• Eliminates itemized deductions and the tax exclusion for newly issued municipal bonds but leaves untouched other big ticket tax preferences such as the exclusion for employer-sponsored health insurance, tax credits, and tax breaks for contributions to retirement and pension plans.
• Extends the current, relatively generous versions of the earned income and child credits, at a cost of over $400 billion.
• Taxes capital gains at ordinary income rates, which loses revenue since investors will take fewer gains in response to those higher rates.

Because JCT starts with higher rates, it may generate more from eliminating deductions than other plans. Still, while the JCT experiment would produce about $2.6 trillion from its base-broadeners, Marc Goldwein of the New America Foundation figures only about $700 billion is used for rate reduction.

The JCT plan is very different from other tax reform proposals. For instance, Alan Simpson and Erskine Bowles, the chairs of President Obama’s fiscal commission, designed a reform that could get rates as low as 28 percent, but did it by eliminating nearly all tax preferences (not just deductions) and scaling back the few that survived.

So, it turns out, JCT doesn’t contradict groups like the Rivlin-Domenci Commission or Simpson-Bowles, it  merely uses different assumptions.

Does it discredit Romney’s plan, as Democrats hope?   Romney’s spokeswoman said on Friday that the JCT study “says nothing about the pro-growth tax reform proposed by Mitt Romney.”  Well, that may be true. But since Romney won’t tell anyone what his plan is, there is no way to know.

The JCT study is best read at 50,000 feet: There are many theoretical models for base-broadening, rate-cutting tax reform, and some efforts to squeeze tax preferences will generate a lot more money than others. But however you do it, tax reform is hard. It isn’t impossible, and it is surely worth trying. But it is very hard.

Republican presidential candidate, Mitt Romney waves to the crowd as he arrives for a rally in Richmond, Va., Friday, Oct. 12, 2012. There is speculation that Romney will propose nearly $5 trillion in tax cuts. Marron argues that without specifics, that figure is merely speculative. (Steve Helber/AP)

Mitt Romney's '$5 trillion tax cut': 5 things you should know

By Donald Marron, Guest blogger / 10.14.12

You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:

1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.

Governor Romney has been very specific about the taxes he would cut. Most notably, he would reduce today’s individual income tax rates by one-fifth (so the 10 percent bracket would fall to 8 percent, the 35 percent to 28 percent, etc.) and reduce the corporate income tax rate from 35 percent to 25 percent. In addition, he would eliminate the alternative minimum tax (AMT), the estate tax, the taxes created in 2010’s health reform act, and taxes on capital gains, dividends, and interest for incomes up to $200,000 ($100,000 for singles). The $5 trillion figure reflects the revenue impact of all those cuts.

But Romney has also said that he intends his reforms to be revenue-neutral, with the specified revenue losses being offset by a combination of economic growth and unspecified cuts in deductions and other tax preferences. The net impact of his reforms would undoubtedly be less than $5 trillion, perhaps much less if he’s aggressive in going after tax breaks or willing to compromise on some of his other tax reform goals (e.g., not raising taxes on investment income). Without any details about what he would do, however, we can’t measure the net revenue impact of his ideas.

2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.

TPC has estimated that the gross tax cuts proposed by Romney would amount to $456 billion in 2015. Budget debates in Washington often focus on ten-year periods, so commentators have coalesced around a natural, if imprecise, extrapolation: multiply by 10 and round up because of a growing economy. Result: $5 trillion over ten years.

3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.

In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits. Because it is measured against current policy, the $5 trillion figure does not include the revenue impact of any of those extensions (but does include a small revenue increase from expiration of the credits).

The current law baseline assumes all tax cuts expire as scheduled yielding almost $5 trillion more revenue than does current policy. Relative to current law, Romney’s tax proposal would thus be roughly a $10 trillion gross tax cut. (The same issue arises with President Obama’s tax proposals, which we estimate amount to a $2.1 trillion net tax increase relative to current policy, but a $2.8 trillion net tax cut relative to current law.)

4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less.

Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates. But that doesn’t mean that all the tax cuts go to top earners. Middle- and upper-middle income taxpayers would also get a gross tax reduction because of the reduction in tax rates, the elimination of taxes on capital gains, dividends, and interest for low and middle incomes, and, for some, the elimination of the AMT. Those gross tax cuts amount to more than $1 trillion over ten years.

5. $5 trillion includes around $1 trillion in gross tax cuts for corporations.

Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.

As he has rightly noted, corporate taxes are ultimately borne by people, including workers and shareholders. Most of the corporate rate reductions would ultimately benefit high-income taxpayers since they own more investment assets and earn higher labor income. But about two-fifths of the benefit would go to low-, middle-, and upper-middle income workers and investors.

Bottom line: Governor Romney has proposed about $5 trillion in specific, gross tax cuts over the next decade relative to current policy, most but not all of which would go to high-income taxpayers. He has also promised to offset a substantial portion of those cuts—presumably in the trillions of dollars—by reducing deductions and other tax breaks, primarily for high-income households. Lacking any specifics, however, we can’t know what net tax cut, if any, he proposes.

Republican presidential candidate, former Massachusetts Gov. Mitt Romney waves as he arrives for a campaign rally at the U.S. Cellular Center on Thursday in Asheville, N.C. Gleckman offers his perspective on if and how Romney's tax plan would work. (Evan Vucci/AP)

Romney plan: Rich to pay same share of taxes? Or $230,000 less?

By Howard Gleckman, Guest blogger / 10.12.12

President Obama says Governor Romney will cut taxes for high-income households by $250,000. Romney counters that under his plan, the rich will pay the same share of taxes they do today. Who’s right?

It all depends on what plan you are looking at and what you are measuring.

The first problem is the two candidates are talking about two entirely different plans. Obama is criticizing a Romney proposal that includes only tax cuts and has none of the offsetting revenue raisers that he promises, but does not describe. Romney, by contrast, is talking about a fully-paid-for plan though he won’t say exactly what it would look like.

But there is a second problem as well. The two men are looking at taxes in vastly different ways that may (not accidently) baffle voters.   

How can somebody both pay more and pay the same? It isn’t alchemy. Instead, it is all about what you are measuring. To understand what the candidates are saying, you have to listen carefully to their language. Obama is talking about tax liability. Romney is talking about tax shares.

Obama frames his argument in terms of the actual tax bill an individual pays. He says Romney has proposed major reductions in taxes for high-income households. And, based on what Romney has been willing to tell us about his plan, Obama is roughly correct. The governor has proposed to extend the 2001-2003 tax cuts, then cut rates by 20 percent across the board, eliminate taxes on investment income for those making $200,000 or less, and repeal the estate tax and the Alternative Minimum Tax.

The Tax Policy Center has found that relative to a world where all the 2001-2003-2010 tax cuts have expired, Romney would cut taxes for those in the top 1 percent by an average of about $232,000 in 2015. Excluding the benefits of making today’s tax law permanent, the top 1 percent would pay about $150,000 less, TPC figures.

Romney insists he will pay for all of those tax cuts (beyond making the 2001-2003 cut permanent) with tax increases and unspecified economic growth. In some fashion, those revenue-raisers would include limits on existing tax preferences, such as deductions, credits, and exclusions.

While he provides no details, Romney says—among other things—that the net effect of his tax cuts and revenue raisers is A) no increase in the deficit and B) high-earners will pay the same share of taxes as they do today. Thus, Romney is talking about the percentage of total taxes people in a particular income class pay, not the amount of tax they pay.

TPC figures the top 1 percent will pay about 27 percent of all federal taxes this year. Thus, Romney is implying that, when all is said and done, the top one percent will still pay about 27 percent of all federal taxes. But, of course, if they are going to get a big tax cut and continue to pay 27 percent of all federal taxes, others will have to get a big tax cut too.

Interestingly, when Romney talks about the middle-class, he changes his language and seems to focus on tax payments, not tax shares.

Still, unless Romney wants to pay for these tax cuts with big spending cuts, or unless his tax cuts generate implausibly fast economic growth, this implies a substantial increase in the federal deficit—which Romney has vowed to avoid.

Which number is better, or at least more descriptive—Romney’s or Obama’s? That depends on what story you are trying to tell.

If you want to argue that high-income households pay an outsized percentage of federal taxes, which the GOP often does, you focus on tax shares. If you care about how much tax individuals pay, as Democrats often do, you might focus on how much of a tax cut, on average, somebody in a particular income class would get from Romney’s plan.

Neither is wrong, but each candidate is putting his own self-serving spin on the matter. As always, when these politicians speak, you need to listen very, very carefully to what they are saying.

Tax payers search through tax forms at the Illinois Department of Revenue in Springfield, Ill., in this April 2010 file photo. Marginal tax rates are useful for consumers, Williams writes. (Seth Perlman/AP/File )

The hidden value of marginal tax rates

By Roberton Williams, Guest blogger / 10.10.12

Each year when I complete my federal income tax return, Turbotax tells me my average tax rate—how much tax I owe measured as a percentage of my total income. But it would be better if I learned my marginal tax rateor MTR—the percentage tax that I would pay on an additional dollar of income. That’s the rate that matters when I make various economic decisions, ranging from whether to give a lecture for an honorarium or whether to sell a stock that has risen in value to whether to give more to charity.

One problem with MTRs, however, is that you likely have more than one. Long-term capital gains and qualified dividends are taxed at lower rates than interest earned on a bank account (if any these days) or wages from a job. Earnings below the cap on payroll taxes that fund Social Security face both income and payroll taxes; above the cap you don’t pay the Social Security tax. Turbotax would have to give me lots of different values.

MTRs matter more than usual this year because of the impending fiscal cliff. If we actually topple off the cliff, MTRs will jump on January 1. The top tax rate on labor income will go from 35 percent to 39.6 percent. Resurrection of the limitation on itemized deductions (commonly known as “Pease”) would boost that by 3 percent of the basic tax rate, or an additional 1.2 percentage points. The new taxes imposed by the 2010 healthcare legislation will add 0.9 percentage points to the current 2.9 percent Medicare tax. Those increases would take the top MTR to 44.0 percent, more than 18 percent higher than the 2012 rate.*

Rates will go up even more on investment income. The top MTR on long-term capital gains will jump by two-thirds from 15 percent this year to 25 percent next year—a combination of a 20 percent basic rate, 1.2 percent from Pease, and 3.8 percent from the healthcare tax. Because dividends will be taxed as ordinary income at the 39.6 percent top income tax rate, t he top MTR on dividends (including the health care tax and Pease)  will nearly triple from 15 percent to 44.6 percent.

MTRs won’t go up only for those at the top of the income scale. Expiration of the 10 percent tax bracket will raise taxes on everyone with taxable income. Households in the 15 percent tax bracket and below will see their tax on capital gains go from zero to 10 percent and their tax on dividends will rise from zero to 15 percent. Average marginal tax rates for all tax units as a group will increase by between 3.4 percentage points on wage income and 18 percentage points on dividends. TPC has estimated the average increases in MTRs on wage and salary income and on investment income for households at various income levels.

Of course, none of this may actually happen. Congress and the president could agree on a tax bill that would leave MTRs little changed. If Mitt Romney gets his way, marginal rates would fall sharply, courtesy of his proposed 20 percent across-the-board rates cut, although the rates may fall less than that depending on which deductions are removed or whether deductions are subject to new phaseouts as income rises. If President Obama gets his way, marginal tax rates may rise only for those in the highest rate brackets.

In the meantime, taxpayers have some decisions to make before the end of the year. If they think capital gains tax rates will go up in 2013, they may want to realize capital gains this year. If they expect that Congress will cut back on itemized deductions and other tax preferences, they might want to give more to charity or prepay state and local taxes. Given the very different tax proposals offered by President Obama and Governor Romney, many taxpayers may wait until after November 6 before making any  decisions to move realized income or deductions forward into 2012.

* Counting both employee and employer shares of the Medicare tax requires including the employer’s share in income. That reduces the 2013 top marginal rate slightly to 44.0 percent. Similarly, the top 2012 MTR is 37.4 percent.