President Obama repeatedly sells his proposed tax increases as a tax on the rich only. He defines the rich as singles earning over $200,000 per year and couples earning over $250,000 per year. This should appeal to all those making less than $200,000 since someone else will pay the taxes. But be careful what you wish for.
For example, The Affordable Care Act, otherwise known as Obamacare, increases the Medicare withholding tax .9% on the wages of singles earning over $200,000 and couples earning over $250,000 effective January 1, 2013. In addition, it imposes a new 3.8% Medicare tax on the investment income of those same individuals.
One very concerning characteristic of this tax increase that gets very little attention is that the $200,000 and $250,000 thresholds are not indexed for inflation. This lack of indexing is concerning because it will impose a future tax increase on those currently making less than $200,000 through inflation and bracket creep. Bracket creep is when you move into higher and higher tax brackets due solely to inflation. Your taxes increase, but your inflation adjusted income does not. Almost all of the current tax code is indexed to protect against inflation and bracket creep.
A good illustration of bracket creep is the Alternative Minimum Tax, or AMT. The AMT is a serious issue today largely because it is not indexed for inflation and as a result, millions more people become subject to it each year. The AMT was originally enacted in 1969 to address 155 high earning taxpayers that legally avoided paying any income tax. Now, what once affected 155 taxpayers affects millions of taxpayers. Congress has been continuously patching the problem because the consequences for the middle class are so hurtful.
If you think the new Medicare tax increase will only affect only the rich, then you have to ask the question: If virtually all the rest of the tax code is indexed for inflation and the AMT has been a serious problem requiring ongoing congressional action because it is not indexed, then why would this act specifically include an income tax threshold that is not indexed? Because it is designed to generate ever increasing future tax revenue without having to pass new legislation. Each year, more taxpayers that were not subject to the tax will begin paying the tax due solely to inflationary increases in income, and the problem compounds with each passing year. This tax will end up the same way as the AMT. What originally only affected the few will affect the many.
Tax indexing is not a small issue, just like the AMT problem is not a small issue. Not indexing this new tax was done by design and is a clear indication that more middle class tax increases are coming because that is where the money is. This is a warning to watch what President Obama does and not what he says or you may find yourself paying taxes you thought were reserved only for the rich.