Grab bag of goodies in Obama's $858-billion tax plan

WASHINGTON (Reuters) - President Barack Obama’s $858 billion tax package is a grab bag of goodies for investors, the affluent and workers, but the richer you are the more you get.

Congress passed the bill after liberal Democrats lost their bid to make it less generous to the wealthy, and Obama signed it into law on Friday.

There is something in the bill for virtually every taxpayer. Low and moderate income workers see a payroll tax cut, and expansion of a tax credit for working families -- priorities trumpeted by Obama.

Still, the farther you are up the income ladder, the bigger bite you get from the deal. The richest 20 percent of taxpayers will see a 5.7 percent boost in after-tax income, while the bottom 20 percent get a 3.7 percent boost, compared to if the tax cuts had expired and Congress had not agreed to other benefits, according to the Tax Policy Center, a think tank.

The deal renews historically low federal income tax rates enacted under former President George W. Bush nearly a decade ago for all income groups. Democrats acquiesced and lost their bid to exclude from those extensions the wealthiest 2 percent of taxpayers.

Beyond renewal of individual rates, many of the wealthiest won a continuation of low capital gains and dividend taxes, a cut in the expected estate tax and repeal of certain limits on deductions typically used by high earners.

“You put those together with the rate cuts that are aimed at the super high end and I think you wind up with a package that favors the wealthy,” said Daniel Berman, a law professor at Boston University.

While the tax package is good news for many in the short term, it deepens the $1.3 trillion budget deficit which unsettled bond markets last week.


The richest two percent of taxpayers do well under the bill. Without it, the dividend rate was set to rise as high as 40 percent, or 20 percent if Obama had his way. That rate will now stay at a top rate of 15 percent.

The affluent also benefit from the weakening of the estate tax. Democrats had wanted to keep 2009 rate of 45 percent after a $3.5 million individual exemption. Now, the wealthy can pass on assets tax free for up to $5 million with a lower tax rate of 35 percent.

A tax on gifts typically paid by the wealthy will stay at 35 percent, its lowest rate since the Depression, instead of rising as it would have under current law.

A couple with two children and cash income of about $300,000 saves about $8,000 by extending the current rates, compared to what they would have owed if the rates expired, according to the Tax Policy Center.

These figures, however, do not include the breaks on investment income.

The law freezes for two years the top two income tax rates at 33 percent and 35 percent, preventing a jump to 36 percent and 39.6 percent where they had been headed.


To be sure, the low and middle income groups do benefit.

They’ll see a cash boost from cuts in the payroll tax -- which fund the Social Security retirement system -- with the rate trimmed from the current 6.2 percent to 4.2 percent. The wealthy also get that benefit, but the payroll tax is not imposed on income above $107,000.

“That is actually good not only as a policy matter but also in how it’s done, because it will put money in people’s pockets at beginning of January,” said Alice Abreu, a tax law professor at Temple University.

Economists and the White House are betting these policies will spur consumer spending to jump-start the fledgling economic recovery.

The middle class also benefit from a fix to the alternative minimum tax, a levy meant to ensure the rich pay some taxes, but which has been roping in taxpayers with more modest incomes because it is not indexed to inflation.

A couple with two kids and $146,450 in income would pay about $4,600 more in taxes without the bill, according to TPC.


Extension of the $2,500 college credit and another child tax credit will help lower income groups more, as they phase out by income. Eight million students take advantage of the college credit, according to the White House.

A typical working family avoids a tax increase of $3,000, according to the White House.

The law keeps current tax rates of 10 percent, 15 percent, 25 and 28 percent for two years. Without action, the 10 percent and 25 percent rates would vanish.


Two big boons for business are a new write-off of 100 percent of investments immediately and prevention of the dividend rate from jumping to 40 percent.

Revival and renewal of a group of business tax breaks -- known as tax extenders -- also made it into the bill. These include the research and development tax credit and a credit for biodiesel.

Editing by Vicki Allen