Obama’s Tax Impact
Well, this post from Above the Law should get people's attention.
BigLaw lawyers love Obama. If one searches by law firm various databases on-line for campaign contributions, one sees an overwhelming sea of blue, and most of it to Obama.
But how will Obama affect BigLaw wallets? On Above the Law, we regularly see commenters threaten to abandon law firms for falling $5,000/year short of market. I therefore thought it worthwhile to examine the effects of Obama’s tax and spending plans on take-home pay.
We all know that Obama wants to end the Bush tax cuts. That is a 3% bump across the board to the bad old days when associates faced a marginal federal tax rate of 36%.
But the real hidden tax is that Obama plans to end the social-security tax cap. Right now, you may notice, sometime during the summer or early fall, your take-home pay suddenly goes up because they stop deducting FICA. Current law caps social security taxes: in 2008, the cap is at $102,000. Obama proposes to abolish this. That mid-summer bump will be no more: add about several thousand dollars to your annual tax bill.
But social-security taxes are not only on employees. The government also charges 6.2% to employers that you never see on your W-2s. But rest assured the partners see this, and will notice that the expense of keeping an associate has risen several thousand dollars a year when FICA taxes double and triple. Will they swallow that additional expense, or take it out of your bonus?
They do a spreadsheet and look at a "typical" law firm associate. The result is grim.
The effect is enormous. Betsy’s marginal tax rate goes up from an already ridiculous 42.5% to 51.4%—not including the new 6.2% marginal tax on your employer. Subject to how she structures her withholding, Betsy’s take home pay drops an average of $515 a paycheck—less in the early months of the year, but much more in the later months of the year. Add in the effects on her bonus, and Betsy loses nearly $20,000/year in take-home pay.
I added a third column: how big a pay cut would you have to take to receive the same take-home income? The answer is that Obama’s tax increases have a bigger effect on your income than a law firm cutting New York salaries by $34,000.
The calculations apply to anyone making that much. The impact of that one, concrete proposal that Obama has offered for raising revenue for his ambitious spending plans will have a disastrous impact on a lot of people. Do read the comments. Readers over there are saying they plan to switch to McCain. There is much amusement to be had over there.
Better yet, this is only the beginning of the tax increases Obama will have to get passed to pay for the insane spending levels he is promising. Things are looking up for McCain already.
I simply must email this link to my sister, the attorney. She'll pitch a fit, I can assure you.
By martian, Tuesday, 26 February , 2008 @ 3:28 pm
It seems like every time Obama actually gets specific about anything (and those times are few and far between) it ends up costing us middle class folks money out of our pockets! I may not make as much as most lawyers, but my wife and I certainly make enough together to get hit hard by the inevitable tax hikes this guy will have to implement. Why is anyone in favor of electing this tax nut?
By sam, Tuesday, 26 February , 2008 @ 3:50 pm
My wife and I are both mid level gov’t employees, but the combined income makes us "rich" according to Mr. Obama. We likely won’t see any of the recently passed rebate, and haven’t been able to contribute to our Roth IRAs for years. Luckily (or unluckily), the Social Security phase out wouldn’t affect us (just barely) but I’m sure his other proposals will slam us big time. Which explains why I plan to vote for the white male candidate.
By K T Cat, Wednesday, 27 February , 2008 @ 7:36 am
The deficit is supposed to break $400B this year. We’re buying things that we’re not paying for. Someone needs to pay the bill. Either we slow spending, raise taxes or continue to use our national credit card. Which should it be?
I don’t mind the tax hike, but I totally dislike his wild spending spree. I think that government growth would be limited if we had to pay for every program as soon as they were created. Right now, both Republicans and Democrats are giving us something for what looks like nothing. We’re voting ourselves free money.
A truly courageous government would raise taxes across the board, on rich and poor alike, until the deficit was gone. So long as one group or another doesn’t have to pay for what they get, they’ll keep asking for more.
<a href="http://windpeddler.blogspot.com/2008/02/tax-policy-fable.html">Dig this little parable</a>.
By Mockinbird, Wednesday, 27 February , 2008 @ 12:49 pm
I have a strong feeling that McCain will be guided by his Repub advisors to do the right things on taxes. He’ll have to much other stuff on his plate to deal with.