NEW YORK -- The average American wage earner can relax: The new budget-cutting bill doesn't lay a glove on your income-tax return. Tax rates don't change, nor do exemptions and deductions. Virtually all of the tax increases hit the top 2.3 percent of taxpayers, who report adjusted gross incomes of $100,000 and up.
Only one change in tax rates reaches further down the income scale, to earnings above $51,300. That's the tax increase for Medicare.
Today, each worker and employer pays 7.65 percent, on the first $51,300 of earnings, to support Social Security as a whole. The self-employed pay 15.3 percent, half of which can be deducted. Of that tax, 1.45 percentage points (2.9 points for the self-employed) go for the Medicare program; the rest goes for retirement and disability.
Starting next year, that 1.45 percent will be levied on incomes up to $125,000. For a majority of upper-middle-income families, this RTC may prove to be the biggest tax increase of all. If you make $125,000 or more, you'll pay an extra $1,068.65. If both you and your spouse are in that rarefied income bracket, you'll pay an extra $2,137.30. The self-employed will be hit even harder.
Affecting both rich and poor taxpayers will be the new excise taxes. But even there, you are being so lightly nicked that you'll barely notice it. Take cigarette smokers, who will pay an extra 4 cents a pack. If you smoke a pack a day, you'll contribute an additional $14.60 a year toward reducing the federal budget deficit. In 1993, your tab doubles to $29.20 a year. The obvious way to save money is to quit smoking.
Wine drinkers will ante up an extra 18 cents a bottle -- barely noticeable on a $5 wine, let alone a $20 wine. For beer drinkers, it's 16 cents a six-pack. That's 2.6 cents a can. If you drink a can a day, you'll pay an extra $9.49 a year.
Drivers of cars were among the interest groups shrieking the loudest when the budget proposal first came out. Their outrage paid off. Instead of the extra 10 cents a gallon they were originally asked for, the bill now calls for only a nickel. If you drive 20,000 miles a year, in a car that gets 25 miles to a gallon, the new 5-cent gasoline tax nips you for $40 a year.
What's so ironic about the great gasoline-tax battle is that, adjusted for inflation and improved fuel efficiency, it is actually cheaper per mile to drive today than it was in 1973, before the first oil embargo. Gasoline is a principal reason we remain so dependent on the Middle East. For national-security reasons, this tax should have gone higher.
Even for some upper-middle-income people, the new income taxes won't be as onerous as they sound. In fact, if part of your income is currently taxed in the 33 percent bracket, your tax bill might stay just about the same. You'll pay a higher Medicare tax, but your income-tax rate will drop to 31 percent.
Depending on your earnings, the rate cut might actually save you money -- especially if you have few or no itemized deductions (which might be the case if you have no mortgage and live in a state without large state and local income taxes).
But taxes will rise for higher-income people with itemized deductions. Under the new law, the deductions will be reduced by 3 percent of your adjusted gross income over $100,000, whether you file singly or jointly. If you report an income of $150,000, for example, your deductions will be reduced by $1,500(3 percent of $50,000). This raises not only your federal tax but your state tax, if your state keys its taxes to federal taxable income.
For the very rich, there are no outs. Their tax rate goes up from28 percent to 31 percent, and their deductions will be slashed.
For the lowest-income families, by contrast, taxes have been cut. The working poor get an income-tax credit if they work to support a child at home, and the size of that credit is being raised. This could wipe out any taxes due and entitle the worker to a payment from the U.S. Treasury.