Effective tax rates are what individuals or companies pay after all their deductions and credits. The marginal tax rates are what the government progressively takes by tax bracket.
For example, an individual taxpayer pays no income tax on the first $8,700 of income, 15 percent of income from $8,701 to $35,350; 25 percent of income from $35,351 to $85,650; 28 percent of income from $85,651 to $178,650; 33 percent of income from $178,651 to $388,350; and at 35 percent for everything above.
Obama proposes to raise the top two rates for individual income above $200,000 and family income above $250,000. That would mean higher taxes for an estimated 30 million businesses that pass their business earnings through their personal income taxes.
The president says this protects middle-class Americans. It’s a distinction Alan Simpson, co-chairman of the National Commission on Fiscal Responsibility and Reform, finds puzzling.
“If you tell a guy on the street that nobody under $200,000 or $250,000 is going to be hit because they’re the middle class, that guy will laugh you right out of your house. There is an absurdity about this throughout,” Simpson, a former Republican senator from Wyoming, told McClatchy.
For big corporations whose shares are traded on the New York Stock Exchange, and who donate heartily to political campaigns, there’s ambivalence about the tax plight of smaller firms. They’re rooting for a deal that averts the fiscal cliff with a temporary measure that promises a comprehensive overhaul of the tax code next year.
In that event, corporations hope to knock down the current corporate tax rate, higher than in most developed nations, to a rate somewhere around 25 percent or 28 percent. In theory, they’d agree to give up myriad tax loopholes in exchange for a lower rate, but already many are scrambling to try to lock in their existing preferential treatment.
Big banks that underwrite mortgages fear a deal that caps or ends the tax deductions homeowners have enjoyed on mortgage interest. Similarly, equipment manufacturers worry about any deal that slows the ability of their buyers to depreciate assets. And abrupt changes to tax rules could hurt companies that have made long-term investments under the current tax laws.
“You cannot flick a light switch on and off and say. ‘Take this,’ ” said Josten, noting that there are anywhere between $5.5 trillion and $7 trillion in depreciable assets outstanding — everything from fleet vehicles to tractors to office buildings.