Friday, May 14, 2010

Nickel and dimed by Obama's microtaxes
By Nina Easton, senior editor at large

(Fortune) -- Woven throughout President Barack Obama's health care reform act are a variety of new taxes on high earners: a 3.8% tax on interest and dividends, a 0.9% increase in the Medicare payroll tax, a $2,500 cap on pretax contributions to flexible savings accounts. Then there are new taxes on the most expensive health insurance plans and on sales of medical equipment like bedpans and catheters. The President's proposed budget is laden with assorted other goodies, including a limit on deductions for mortgage interest and charitable contributions, and a capital gains hike.

It's easy to get lost in the maze of new levies. Which is really the point, at least as a political strategy. Call it nickel-and-diming by a President who seems to instinctively understand the electoral dangers of imposing a single broad new levy -- even on people he defines as high income. (Manhattan families earning just over $250,000 -- not exactly a killing in New York City -- that means you.) Even his plan to raise the top two individual income tax rates is marketed as a rollback of unfair tax cuts under President Bush. Some of us would call it a hike.

Not long ago House Democrats were pushing a more overt "millionaire's tax." At least the intention was clear. Instead, the White House is pursuing a drip, drip, drip of microtaxes on the nearly 3.5 million households Obama considers wealthy enough to fund his government plans. And, oh, how those nickels and dimes add up. "We estimate that the health reform law will take an additional $52,000 on average from the top 1%" of earners, concluded the nonpartisan Tax Foundation. Households affected by the expiration of the Bush tax cuts -- along with other tax hikes in his budget -- will pay an additional $17,925 on average. Citizens, especially the so-called wealthy, aren't going to be happy about the onslaught of new tariffs.

A huge segment of the country has always felt overtaxed. In 1938, when taxes were roughly 17% of income, a Fortune survey found that nearly half of all Americans thought they paid too much relative to what they got in return. That number was remarkably similar -- 46% -- when Gallup asked the question last year, as taxes were eating up roughly 30% of our paychecks. We can presume, moreover, that those who actually pay federal income taxes -- a record 36% do not -- will be especially irked by politicians who want them to send more of their hard-earned money to Washington.

In recent years Democrats have enjoyed a reputation as the most trusted party on tax questions. That is now changing, with Republicans gaining the upper hand in the latest NBC News/Wall Street Journal poll. Obama's tax hikes fuel the mood shift. But the White House's ambitious spending also plays a role: Americans think half their money is wasted by government.

This is a dangerous political environment for President Obama as he faces his next big economic challenge: what to do about a national debt scheduled to balloon to 77% of GDP in the next decade. It's hard to microtax your way out of that one, and it's far from clear that this administration has the stomach for massive cuts to entitlement programs. He can keep squeezing revenue out of the rich, but the top 1% of earners already pay more in federal income taxes than the bottom 95% combined.

That, of course, is why some politicians are floating the idea of a value added tax (VAT) -- an embedded sales tax that hides all those nickels and dimes along the production chain. It's a big revenue raiser that offers the illusion that people won't really notice a little tax here, a little tax there.

But all that loose change adds up to hundreds and thousands of dollars. Upper-income earners are stirring tax revolts this election year, despite White House efforts to suggest that its collection of taxes won't be quite so painful. If Democrats pursue a VAT that adds to the tax burden of average Americans, the middle class will sit up and take notice too. And that adds up to a big headache for Democrats -- in 2010, 2012, and beyond.