Before progressive Democrats pummel President Obama too much for "caving" on the $250,000 threshold for raising taxes, we all should look carefully at the bill that passed the Senate in the last minutes of 2012. The bill, if it can make it through the House with its tea-poisoned GOP caucus, actually raises taxes on all Americans, but it does hit the wealthy the hardest.
Here's how it works:
Individuals with incomes of $400,000 or more, and couples with incomes of $450,000 or more, will see their top tax rate go from 35 percent to 39.6 percent. (Remember that no one's income is taxed at the highest rate for every dollar. The 39.6 percent simply affects earnings over those amounts.) Additionally, personal exemptions and itemized deductions will begin to phase out for people making $200,000 or couples making $250,000 or more, giving the president an "out" for his $200,000/$250,000 threshold.
Every working person will pay more under this compromise because the temporary recession stimulus of a 2 percent cut in FICA taxes (Social Security and Medicare) will be allowed to expire. (These are the taxes that Mitt Romney conveniently "forgot" about when he wrongly said 47 percent of Americans pay no income taxes. FICA taxes are paid on a person's income and are regressive because everyone pays the same amount, about 7.5 percent of gross income, regardless of income.)
The estate tax will increase from 35 percent to 40 percent, but not on the first $5 million of estate value. That's hardly surprising, considering that most members of the Senate are multi-millionaires. Most people who get income from capital gains and/or dividends won't notice the rise in their tax from 15 percent to 20 percent because the higher tax rate doesn't kick in until annual income goes above that $400,000/$450,000 threshold. Not only that, but the 3.8 percent surcharge on investment income that was part of the Affordable Care Act (ACA) means the top rate on investment income would increase to 23.8 percent for the richest Americans.
I've already noticed inaccuracy in reporting on this bill, even from the venerable New York Times. In the Times, Jonathan Weisman says, "The Senate,..in a pre-dawn vote two hours after the deadline passed...overwhelmingly approved legislation on Tuesday that would allow tax rates to rise only on affluent Americans..." That's wrong. FICA taxes are collected on gross incomes. The tax rate for FICA is going up. Believe me, if I only made $200 a week, the extra $218 I'll be paying in taxes this year is definitely an increase in my "tax rate."
Just as important to Obama were some other things fixed by this bill, plus the fact that he recognizes that voters want to see politicians compromise. The bill extends federal farm policies through September, avoiding a possible doubling of milk prices. While the bill took away the pay raise for this "do-nothing" Congress. Sadly, it also ended overdue pay raises for all federal workers. Extremely important to President Obama was the inclusion of an extension of unemployment insurance for a full year. Without that provision, over 2 million Americans would have lost unemployment benefits.
As I expected, Congress refused to give up its leverage by foregoing another debt ceiling fight at the start of the next Congress. So, the inability to conduct business because of political obstruction will likely go on and on, as will what to do about the automatic, across-the-board budget cuts that this bill simply postpones for another day.
Sen. Tom Harkin, Paul Krugman, and other liberals are extremely disappointed that Obama didn't hold out for the $250,000 threshold for income tax increases, believing that Republicans would have been forced by public pressure ultimately to agree to the lower amount. That may or may not be true. However, I personally believe that the president read the politics of this thing correctly. If no compromise had been reached in either branch of Congress, the corporate media would then have blamed both sides equally for the inability to compromise.
In just about every opinion poll taken, Americans want to see compromise in Washington. They want to see problems addressed in a bipartisan way. So do I. I'm sick and tired of posturing politicians playing into the hands of media that want everything to be turned into a conflict where the media will be able to blame both sides for the gridlock that is caused mainly by a dysfunctional House of Representatives that has been poisoned by tea party extremists.
I would rather have a compromise that doesn't give me all that I hoped for, rather than make it seem to the business community and the rest of the world that the government can't get anything done, even when faced with events that could lead to another recession. So, this compromise is okay with me. We'll have to wait and see if the House feels the same way.