According to the Washington Post, President Obama plans to create a new health care trust fund that will cost $634 billion over ten years. The money for this fund will be generated by a massive tax increase on those earning over $250,000 in income. The Administration estimates that a total of $318 billion will be generated by this tax increase. According to the President’s Budget proposal, the plan will raise revenue by limiting the tax rate for itemized deductions to twenty-eight percent for tax filers over $250K.
This tax increase alone will boost the annual tax burden of these taxpayers by almost a fifth each year, and this is before President Obama lets the Bush tax cuts expire. It is not sustainable to try to pay for all the new government programs on such a small group of tax filers. There are less than four million tax filers with income over $250K. This one tax increase will increase their taxes by almost $8000 on average. There will be behavioral changes where these earners will shift their compensation into areas that are subject to less punitive taxation.
If these workers take their compensation in capital gains and dividends, then this proposal will not raise as much money as predicted. Capital gains and dividends are taxed at a lower rate and will be even more favored over ordinary income such as interest or wages. As the Administration piles tax increases on tax filers over $250K, the incentive to shift or defer income will increase.
UPDATE: Related thoughts from the TaxProf Blog.