Under President Obama’s latest proposal, American families with taxable incomes of more than $250,000 a year would get a tax increase next year.
That’s because Mr. Obama is urging Congress to extend the Bush-era tax cuts only on amounts less than that.
So who are the people who would be forking over more of their money to Uncle Sam, and are they rich?
They could be your neighbors, one a banker and the other a lawyer, especially if you live in an expensive high-rise in New York City. Or, it could be the rancher who is still driving a 1980s-era pickup truck. Or, maybe it’s the retiree in Florida who plays tennis every day and still tells his son or daughter how to run the family business. Many are likely to be entrepreneurs.
“Some of these people are small-business owners and employers,” says Don Siegel, dean of the business school at the University at Albany. “They will get slammed because of this tax, the Obamacare taxes, and the increase in taxes on investment income.”
According to US Census data, households with incomes of more than $200,000 a year (there are no Census data for the $250,000 income level) are likely to live in the South, the West, and the Northeast. The largest concentration is in the south Atlantic (think Florida), followed by the Pacific states and then the mid-Atlantic, which includes the New York metro area. The majority don’t live in what the Census terms a “principal city” but may reside in a well-heeled suburb. Very few reside in rural places, outside of metro statistical areas.
Married couples filing their taxes jointly constitute the largest single group of high-wage earners. Yes, that banker and lawyer living in a high-rise, or, more likely, in a single-family house in a leafy suburb.
According to the Census data, this represents 3.8 million households.
There are also 133,000 male heads of households and 143,000 female heads of households who make more than $200,000 a year.
Using a somewhat different method of collecting data, the Tax Policy Center, a partnership between the Urban Institute and Brookings Institution, estimates that about 6.07 million Americans earned above $200,000 in 2011. They make up the top 4.2 percent of taxpayers. But their income, an estimated $3.5 trillion, represents 32.5 percent of all the cash income earned.
A significant amount of the income for the rich comes from sources other than wages, such as business income or capital gains. In the case of capital gains, the tax rate will rise from 15 percent to 23.8 percent for those with incomes over $250,000 if Congress does not renew the Bush-era cuts. The well-heeled also make a significant amount of money from corporate bonds, tax-free bonds and dividends, and other capital gains.
According to the Tax Policy Center, people making more than $1 million got 42 percent of their income from such capital income. Their total capital income of $536 billion is more than all the capital income earned by households making from $75,000 to $1 million.
There is no question that under the Obama plan they will pay much higher taxes unless Congress renews the Bush-era lower rates. The top rate on unearned income such as dividends and interest would rise to 43.4 percent on Jan. 1, when the Affordable Care Act’s 3.8 percent surtax on unearned income of over $250,000 kicks in.
[Editor's note: The first two paragraphs of this story were revised to accurately reflect Obama's tax proposal.]