In his February 24, 2009, speech to Congress, President Barack
Obama described his plan to increase the tax burden on high-income
Now, let me be clear--let me be absolutely clear, because I know
you'll end up hearing some of the same claims that rolling back
these tax breaks means a massive tax increase on the American
people: If your family earns less than $250,000 a year--a quarter
million dollars a year--you will not see your taxes increased a
single dime. I repeat: Not one single dime. [Applause.] Not a dime.
In fact, the recovery plan provides a tax cut--that's right, a tax
cut--for 95 percent of working families. And by the way, these
checks are on the way.
According to the President's fiscal year (FY) 2010 budget
blueprint, wealthy taxpayers will indeed pay a higher tax rate on
the income they derive from wages and salaries, taxable interest,
business income, capital gains, dividends, and retirement income.
The President also proposes to scale back the value of their
itemized deductions, such as charitable contributions, state and
local taxes, and mortgage interest.
Specifically, President Obama proposes to:
- Reinstate the 36 percent and 39.6 percent rates (up from the
current rates of 33 percent and 35 percent) for taxpayers earning
more than $250,000 (married) and $200,000 (single);
- Reinstate the personal exemption phase-out and limitation on
itemized deductions for those taxpayers earning over $250,000 or
$200,000, respectively; and
- Increase the top rate on capital gains and dividends from 15
percent to 20 percent for those taxpayers earning more than
$250,000 or $200,000, respectively.
Altogether, the White House Office of Management and Budget
projects that these changes will raise taxes on wealthy Americans
by $636.7 billion over the next decade, with the increase projected
to start at $28.4 billion in 2011 and rise quickly to $49 billion
in 2012, $58.1 billion in 2013, $67.3 billion in 2014, and $98.6
billion by 2019.
President Obama believes America's wealthiest households have
become too wealthy and that the best way to "remedy" this situation
is to increase their federal tax burden. In a message accompanying
his FY 2010 budget, the President explained his reasoning:
For the better part of three decades, a disproportionate share
of the Nation's wealth has been accumulated by the very wealthy.
Yet, instead of using the tax code to lessen these increasing wage
disparities, changes in the tax code over the past eight years
According to the Internal Revenue Service, the Nation's top 400
taxpayers made more than $263 million on average in 2006, but paid
income taxes at the lowest rate in the 15 years in which these data
have been reported. In constant dollars, the average income of the
top 400 taxpayers nearly quadrupled since 1992.
It's no surprise, then, that wealth began to be ever more
concentrated at the top. By 2004, the wealthiest 10 percent of
households held 70 percent of total wealth, and the combined net
worth of the top 1 percent of families was larger than that of the
bottom 90 percent. In fact, the top 1 percent took home more than
22 percent of total national income, up from 10 percent in 1980...
And these disparities are felt far beyond one's bank statement as
several studies have found a direct correlation between health
outcomes and personal income.
However one assesses his rationale, it is clear that the
President's proposal will dramatically increase the federal tax
burden on a relatively small group of taxpayers. This paper examines
the geographical distribution as well as the extent of these
proposed tax increases. The analysis relates solely to the
President's proposal to increase the top marginal tax rates on wage
and investment income on the wealthiest taxpayers as well as his
proposal to phase out their personal exemptions and cap their
itemized deductions, and omits any additional tax increases that
may be borne by these same taxpayers as a result of efforts to
reform health care or control the emission of carbon dioxide
through a "cap-and-trade" scheme.
Where Do They Live?
Not surprisingly, President Obama's proposed tax increase will
affect some regions more severely than others. Affluent residents
in major metropolitan areas, such as the tri-state New York region,
the San Francisco Bay Area, Los Angeles, Philadelphia, Miami,
Chicago, Boston, Seattle, Las Vegas, and Washington, D.C., will
face the largest tax hikes--which could exceed $2,000 per month per
IRS data for the 2006 tax year, the latest year for which this
data is available, tells us where these wealthy taxpayers reside.
Taxpayers with incomes of at least $200,000 can be sorted by
metropolitan area, county, congressional district, and even zip
code. Their non-salary income (additional income from dividends,
interest, capital gains, and small businesses, as well as
distributions from IRAs, pensions, and other forms of retirement
income) is also known, as well as their total tax payments for that
While their investment portfolios, home values, salaries, and
bonuses may be dramatically lower due to the current economic
recession, their geographic distribution is likely to remain the
same. Beverly Hills, Fifth Avenue, Greenwich, and Pacific Heights
will continue to be enclaves of great (if somewhat diminished)
wealth relative to other parts of the country. In any event, White
House economists claim that by 2012 (the first year in which the
full force of the tax hikes will take effect) the economy will be
growing at a robust 4.6 percent clip, the unemployment rate will
have fallen to 6 percent, and inflation will be a relatively
inconsequential 2 percent. Income tax receipts in 2012, they also
predict, will have recovered as well, increasing from $1,044
billion in 2006 to $1,378 billion. The current economic malaise,
in short, will be but a historical footnote.
Examining where these taxpayers live can offer a reliable
roadmap to determining who will pay these higher taxes, and can
help inform lawmakers at the state, local, and federal levels how
the proposed tax hikes could affect their constituencies.
Who Will Pay?
In 2006, more than 3.9 million taxpayers reported income in
excess of $200,000--these are the people who will comprise the
overwhelming majority of those facing tax increases under the
President's plan. Including non-salary income, these
taxpayers earned $1.7 trillion that year, an average of $435,300
There are disproportionately large concentrations of these
high-wage households in the largest metropolitan areas. While the
15 largest metro areas are home to one-third of the nation's
taxpayers, almost half (1.9 million) of those targeted for the
President's tax increase live in these regions, and because their
incomes are so high (an average of $498,000) they will be
responsible for a disproportionate 62 percent of the national
The formula used to calculate the extent of the proposed tax
increase is as follows:
- Calculate the total income for households with wage and salary
incomes over $200,000 per year.
- Subtract $250,000 in wage and salary income, personal
exemptions, and total itemized deductions for each affected
- Apply the higher income tax rates, assumed to be an additional
3.5 percentage points, to the remaining income.
- Assume the tax on all capital gains and dividend income
reported by these taxpayers will rise by 5 percentage points.
- Add an additional amount of tax liability (drawn from Obama's
own budget documents) to reflect the added tax owed under his
proposal to cap itemized deductions, such as charitable giving, and
phase out personal exemptions for high-income households.
Under this formula, these 3.9 million taxpaying households will
face a total annual tax increase of about $49.8 billion, nearly
identical to the increase projected by the White House for the
first full year in which the President's tax increase is in effect
A significant amount of this increase, moreover, will be borne
by small business owners who file as individuals. According to a
recent Joint Committee on Taxation analysis of the President's
proposal, nearly half (47 percent) of the income that would be
subject to the marginal tax rate increases would be income earned
by small business owners who file as individuals.
A Big Bite Out of the Big Apple
Nearly half a million wealthy households in the tri-state New
York metropolitan area would bear the largest tax increase, in both
relative and absolute terms. With nearly 7 percent of the nation's
taxpayers, the tri-state area is home to a little more than 12
percent of the nation's top earners, whose average annual incomes
exceed $586,000. The average increase for these taxpayers will be
$20,223 per year. Taxpayers in Manhattan will be hit the hardest,
being required to fork over an additional $42,438. The tax increase
for the Big Apple's economic elite is $9.75 billion per year, which
amounts to nearly 20 percent of the national total.
The story is much the same for other large metro areas. Over
136,000 well-heeled taxpayers in the San Francisco Bay Area will be
required to pay more than $2.3 billion in additional taxes, about
$16,700 each. In Boston, more than 112,000 targeted households
would be required to ante up an additional $1.9 billion; in the Los
Angeles metro area, the burden will be $3.1 billion spread among
214,000 households; in Chicago, the increase will be $2.6 billion
per year, and so on. For the estimated tax increase for affected
taxpayers in the 15 largest metropolitan areas, see Table 1.
The President's proposal to raise the top tax rate on capital
gains and dividend income from 15 percent to 20 percent
disproportionately affects affluent seniors, who derive more of
their income from investments than the working age population. In
the Miami metro area, home to large numbers of affluent seniors,
the 91,400 affected households earn more from capital gains ($25.9
billion) than from wages and salaries ($21.9 billion), one of the
few major metropolitan areas where this is true. Not surprisingly,
the average tax increase for affected Miami taxpayers is
considerably higher than the national average at $26,900; in Palm
Beach County it is a sky-high $37,628. Affected taxpayers in the
Las Vegas metro area also fit the profile of Miami, earning more in
capital gains ($6.5 billion) than in salary and wages ($5.3
billion). In all, more than 22,500 Las Vegas taxpayers will be
required to send an additional $583 million to Washington, or
$25,912 per affected household.
Tax Increase by Congressional
Affluent taxpayers in 47 congressional districts will face a
total annual tax increase of $250 million or more; in six districts
the increase will exceed $1 billion. Two New York City
congressional districts, separated only by a narrow sliver of
Representative Charles Rangel's Harlem constituency, reflect the
two extremes of wealth in America. The so-called Silk Stocking
district on Manhattan's East Side, represented by Carolyn Maloney,
includes the heaviest concentration of these targeted taxpayers
(48,124), while her colleague slightly to the north, Jose Serrano,
who represents the impoverished South Bronx, has only 137 taxpayers
with wage and salary income sufficient to warrant a tax increase
under the President's proposal. See Table 2 for the 50
congressional districts in which taxpayers face the largest
aggregate tax increases.
Wealthy taxpayers in 14 states face annual tax increases in
excess of $1,000 per month. In five-- Wyoming, Nevada, New York,
Florida, and Connecticut--the annual tax increase exceeds $20,000
per affected taxpayer. At the other extreme, the average annual tax
hike will be less than $500 per month in 7 states--West Virginia,
North Dakota, Iowa, Alaska, New Mexico, Maine, and Mississippi.
As the above analysis suggests, the brunt of the President's
proposal to increase the tax burden on America's most economically
successful citizens will impact some regions more severely than
others. Lawmakers who represent constituencies with heavy
concentrations of successful entrepreneurs, investors, and other
professionals should appreciate the full extent to which their
local economies will have to shoulder this new, often
multi-billion-dollar annual tax burden. While it is not the purpose
of this paper to discuss the potential economic harm that could
befall these regions, lawmakers need to appreciate that major
tax policy changes, such as those proposed by the President, do not
occur in a vacuum.
Franc is Vice President of Government Relations at The Heritage
Foundation. Landon Zinda, Research Assistant and Outreach
Coordinator for Government Relations, contributed to this
State-by-State List of Taxpayers With Income More
Taxpayers With Income More Than $200,000, by Congressional
Ibid.,Table S-6, "Mandatory and Receipt
Proposals," p. 123.
budget resolution for FY 2010 essentially incorporates this
Laura Meckler, "Tax Boost Proposed for Estates, Firms," The Wall
Street Journal, May 9, 2009, p. A3, who reports on the
Administration's proposal to squeeze an estimated $60 billion "in
new tax increases over 10 years on wealthy estates, businesses and
others to make up for shortfalls in its fund to pay for an
expensive overhaul of the health-care system."
for example, media accounts indicating that the amount set aside in
the FY 2010 budget for a cap-and-trade initiative is inadequate:
"President Obama's climate plan could cost industry close to $2
trillion, nearly three times the White House's initial estimate of
the so-called 'cap-and-trade' legislation, according to Senate
staffers who were briefed by the White House" (The Washington
Times, March 19, 2009). Or "A top White House economic adviser
told Senate staff a proposed cap-and-trade system could raise 'two
to three times' the administration's existing $646 billion revenue
estimate, according to five people at the meeting. Jason Furman,
deputy director of the National Economic Council, offered the
estimate at a Feb. 26 meeting on Capitol Hill with a bipartisan
group of staffers..." (The Wall Street Journal, March
A New Era of Responsibility,
Table S-3, "Baseline Projection of Current Policy by Category," p.
relatively small number of additional taxpayers--approximately
100,000 nationwide--earn enough in non-salary income to meet the
President's standard for a tax increase ($250,000 for joint filers,
and $200,000 for those filing as individuals). IRS data does not
allow identification of these taxpayers, so they are not included
in the following calculations.
Total income is the total of wages and
salaries, taxable interest, business income, and retirement income
from pensions, annuities, Social Security, IRA distributions, and
self-employment retirement plans.
Itemized deductions include deductions for
charitable contributions, state and local taxes, and mortgage
Representative Dave Camp (R"MI), Ranking
Republican on the Committee on Ways and Means, memo, "Effect of
President Obama's and Congressional Democrats' Proposed Tax
Increases on Small Business Activity," April 23, 2009.
Political scientists may find it interesting
that 42 of these 50 congressional districts are in so-called Blue
States: states whose voters opted for the Democratic presidential
candidate in November 2008.
For a detailed analysis of how changes in
marginal tax rates can affect the overall level of economic
activity, both positively and negatively, see U.S. Department of
the Treasury, Office of Tax Analysis, A Dynamic Analysis of
Permanent Extension of the President's Tax Relief, July 25,
2006. In light of the recent decision by Treasury officials to
remove this study from its Web site, copies may be requested
directly from the author.