The Forgotten Tax Increase

The only good thing we can say about taxes going into 2016 is that at least they are not going up this year. Such was not the case in 2013, 1991, 1993—and especially 1994. In fact, the “Bush tax cuts” notwithstanding, the forgotten tax increase of 1994 is still with us.

Early in 2013, to avert the “fiscal cliff,” the lame duck Congress passed, with the help of 40 Republicans in the Senate and 85 Republicans in the House, the American Taxpayer Relief Act of 2012 (PL 112-240, H.R.8). The six tax brackets (10, 15, 25, 28, 33, and 35%) of the so-called Bush tax cuts (the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003) that were set to expire at the end of 2010 until they were extended, with modifications, by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ((PL 111–312, H.R.4853), were made permanent. However, for those earning over $400,000 a year ($450,000 for married couples), the top marginal tax rate increased to 39.6 percent. Additionally, the estate tax rate increased, the tax rates on long-term capital gains and dividends were raised on higher-income taxpayers, the personal exemption and itemized deduction reductions were reinstated, the temporary payroll tax cut of 2011 and 2012 was not extended, and refundable tax credits were expanded. The Making of the King... Laurence M. Vance Best Price: $15.25 Buy New $16.50 (as of 09:10 EST - Details)

Thanks to Obamacare, also beginning in 2013 was an additional 0.9 percent Medicare tax on the pay of those earning above a threshold of $200,000 ($250,000 for married couples). This increases the employee share (the employer share is not affected) of the Medicare tax (currently 1.45 percent) to 2.35 percent on that portion of income that is over the threshold. There was also a new 3.8 percent Medicare tax on certain investment income.

The Omnibus Budget Reconciliation Act of 1990 (PL 101-508, H.R.5835) added for 1991 a new 31 percent tax bracket to the two existing brackets of 15 and 28 percent. It also increased the alternative minimum tax, limited itemized deductions, phased out the personal exemption, instituted an unemployment insurance surtax, increased taxes on tobacco and alcohol, and instituted a luxury tax on expensive automobiles, boats, airplanes, jewelry, and furs. In addition, the cap on taxable wages for Medicare was raised from $53,400 to $125,000. The bill was passed with the help of 19 Republicans in the Senate and 47 Republicans in the House. But I thought Republicans were opposed to tax increases? Evidently not when a Republican is in the White House. In signing this legislation, President George H.  W. Bush violated his promise not to raise taxes.

The Omnibus Budget Reconciliation Act of 1993 (PL 103-66, H.R.2264) added for 1993 two additional tax brackets of 36 and 39.6 percent, increased the maximum corporate tax rate, increased the alternative minimum tax rate, raised the gas tax, increased the portion of Social Security benefits subject to income taxes, expanded refundable tax credits, increased estate and gift taxes, and repealed the luxury tax on everything but automobiles. This time not a single Republican in either the House or the Senate voted for this bill. What a difference having a Democratic president makes.

War, Empire, and the M... Laurence M. Vance Best Price: $5.24 Buy New $9.79 (as of 09:10 EST - Details) Buried in the Omnibus Budget Reconciliation Act of 1993 was an insidious provision that began in 1994 that remains with us to this day. I am referring to “Title XIII—REVENUE, HEALTH CARE, HUMAN RESOURCES, INCOME SECURITY, CUSTOMS AND TRADE, FOOD STAMP PROGRAM, AND TIMBER SALE PROVISIONS, CHAPTER 1—REVENUE PROVISIONS, PART VI—OTHER CHANGES, Subchapter B—Revenue Increases, PART I—PROVISIONS AFFECTING INDIVIDUALS, Subpart B—Other Provisions, Sec. 13207. Repeal of limitation on amount of wages subject to health insurance employment tax.”

From 1966 to 1990, the “contribution and benefit base” (the amount of one’s income subject to taxation) for Medicare was the same as that for Social Security. For the years 1991 to 1993, it more than doubled that of Social Security, rising from $53,400, $55,500, and $57,600 to $125,000, $130,200, and $135,000. But beginning in 1994, there has been no limitation on the amount of earnings subject to the 2.9 percent (split between employers and employees) Medicare tax.

This was a huge payroll tax increase, even though the tax rate did not increase. A huge increase that the “Bush tax cuts” neglected to do anything about. But even without the “Bush tax cuts,” when Republicans controlled both Houses of Congress for over four years under President Bush, they could have easily rolled back the Medicare “contribution and benefit base” to the same as that for Social Security. They actually could have done a lot of things. Like make the “Bush tax cuts” permanent. Like eliminate some tax brackets. Like cut taxes even further. Like eliminate refundable tax credits. Like eliminate the alternative minimum tax. Like cut anything from the federal budget. Instead, they drastically increased spending and the national debt.

It was actually President Obama who presided over the only payroll tax cut in history. As part of the deal to extend the “Bush tax cuts,” the employee share of Social Security taxes was reduced from 6.2 to 4.2 percent for 2011. And when Obama proposed extending this payroll tax cut for another year, Republicans generally opposed doing so.

Republicans seem to have forgotten about the huge tax increase in 1994. They break their arms patting themselves on the back for inaugurating and extending the “Bush tax cuts” even though some Americans still had to turn over 35 percent of their income to the federal government. And that was just to pay their income tax. On top of that they had to pay their payroll taxes, federal excise taxes on gasoline and airline tickets, and state and local taxes. Even under the Bush regime, with Republicans fully in charge, Americans were heavily taxed. And regardless of what the Republican presidential candidates say about tax reform, don’t expect anything to really change. Republicans, after all, just like Democrats, think the U.S. government is entitled to a portion of every American’s income.