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In 1960, only 3% of tax filers paid a 30% or higher marginal tax rate. By 1980, after the inflation of the 1970s, the share was closer to 33%. In 1981, Congress realized the inequity in these "stealth" tax increases by requiring tax brackets be indexed for inflation. Without such indexing, lower income persons are eventually subjected to higher marginal rates of tax as their income rises with inflation, even though they have not really increased their income on after-tax basis. Similar "bracket creep" has occurred in the context of the alternative minimum tax, which once-upon-a-time only applied to 1% of U.S. taxpayers.

The current House health bill has not indexed two main tax features for inflation: the $500,000 threshold for the 5.4-percentage-point income tax surcharge, and the payroll level at which small businesses must pay a new 8% tax penalty for not offering health insurance. Therefore, as time (and inflation) march on, more and more taxpayers will be subject to these new taxes without any real increase in income level.

Also worthy of note is that the surcharge will apply to capital gains and dividends. Thus, the capital gains tax rate that is now 15% would increase in 2011 to 25.4% with the surcharge and repeal of the Bush tax rates. The tax rate on dividends would rise to 45% from 15% (5.4% plus the pre-Bush rate of 39.6%).

The increase in taxes on capital gains and dividends is what it is, and is being discussed here only because this point is not widely known. The lack of indexing for the new taxes and penalties, however, is a dishonest method of raising taxes, since it effectively raises taxes each year without a new Congressional vote or presidential approval.

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