The Return of the Inflation Tax

[thundley4]

The Pelosi tax surcharge applies to capital gains and dividends.

All of those twentysomethings who voted for Barack Obama last year are about to experience the change they haven't been waiting for: the return of income tax bracket creep. Buried in Nancy Pelosi's health-care bill is a provision that will partially repeal tax indexing for inflation, meaning that as their earnings rise over a lifetime these youngsters can look forward to paying higher rates even if their income gains aren't real.

In order to raise enough money to make their plan look like it won't add to the deficit, House Democrats have deliberately not indexed two main tax features of their plan: the $500,000 threshold for the 5.4-percentage-point income tax surcharge; and the payroll level at which small businesses must pay a new 8% tax penalty for not offering health insurance.

This is a sneaky way for politicians to pry more money out of workers every year without having to legislate tax increases. The negative effects of failing to index compound over time, yielding a revenue windfall for government as the years go on. The House tax surcharge is estimated to raise $460.5 billion over 10 years, but only $30.9 billion in 2011, rising to $68.4 billion in 2019, according to the Joint Tax Committee.

Americans of a certain age have seen this movie before. In 1960, only 3% of tax filers paid a 30% or higher marginal tax rate. By 1980, after the inflation of the 1970s, the share was closer to 33%, according to a Heritage Foundation analysis of tax returns.

These stealth tax increases—forcing ever more Americans to pay higher tax rates on phantom gains in income—were widely seen to be unjust. And in 1981 as part of the Reagan tax cuts, a bipartisan coalition voted to index the tax brackets for inflation.

WSJ

Just another way that everyone working people get screwed by this bill.

[franksolich]

Ah, one remembers when Reagan tried (and ultimately succeeded, but it was a tough go) to index income tax rates to inflation.

Because of the horrendous rate of inflation during the administration preceding his, poor people were still being taxed at the rates aflluent people had been taxed in 1961.

Six thousand dollars a year was good money in 1961; not so in 1981.

It was a real rough-and-tumble fight, to get tax rates adjusted for inflation.

The main culprits--the obstructionists--were dead ted in the U.S. Senate and Tipsy O'Neill in the U.S. House; so much for their "concern" for the poor.

[thundley4]

Ah, one remembers when Reagan tried (and ultimately succeeded, but it was a tough go) to index income tax rates to inflation.

Because of the horrendous rate of inflation during the administration preceding his, poor people were still being taxed at the rates aflluent people had been taxed in 1961.

Six thousand dollars a year was good money in 1961; not so in 1981.

It was a real rough-and-tumble fight, to get tax rates adjusted for inflation.

The main culprits--the obstructionists--were dead ted in the U.S. Senate and Tipsy O'Neill in the U.S. House; so much for their "concern" for the poor.

Many people get raises that follow cost of living or just barely above it.  People have complained about real income not progressing much in the past decade, wait until they see their real income decreasing under this plan.