For average Americans, the 1994 tax season has been no more excruciating than most. As the Clinton administration promised last year when the new tax bill was signed, the middle class has hardly been touched. But for high-income earners, who have also been hit hard by the stock market recently, this has been a season of bitter discontent. Although there is no evidence that the new tax rates have fulfilled the conservative prophecy of an economic slowdown, they have definitely taken some of the fun out of pulling down top dollar.
Fewer than 2 percent of the nation’s 115 million taxpayers have seen their tax tab rise, but for them, the bite is a big one. it stung even more painfully because the most significant change, the creation of two new top brackets, is retroactive to Jan. 1, 1993. Single people who make more than $115,000 and couples with incomes above $140.000 now pay 36 percent, up from 31 percent. For those who have taxable incomes of more than $250,000, the rate jumps to 39.6 percent.
Some economists still insist that jacking up taxes on the rich will backfire, but with the economy growing strongly enough to worry an inflation-conscious Federal Reserve, such a scenario seems less likely “I think the drag effect that this tax hike was supposed to have was greatly exaggerated,” says Wharton business-school professor Jeremy Siegel. “Even if those taxed more do cut down on spending, it simply isn’t a big enough group to influence the economy.
But some say the broad effect remains to be felt. Although many wealthy taxpayers were warned late last year that their bill would shoot up, some of those hardest hit say it didn’t sink in until the tax form was actually shoved under their noses to be signed. Now they are weighing which luxuries to relinquish. “When my wife called to say that we were going to have to pay $21,000 more this year even though my income fell somewhat, I saw the good life flash before my eyes,” says Stewart Cashman, partner in a Philadelphia law firm.
For many, the impact was worse because withholding tables weren’t changed until this year. That means little of the tax was paid in advance. Cash made in the recent bull market left a nasty after-taste too; many investors realized highly taxable short-term gains. “Suddenly, they get an accounting of their stock-market activities and they realize they owe $40,000 in tax,” says Dennis Kroner, a Chicago accountant. Brokerage-house employees may have enjoyed lavish bonuses this past Christmas, but their smiles likely vanished when they found out how little of the take they actually took home. Larry Scheinfeld of KPMG Peat Marwick says his richest clients haven’t stopped spending, but those who earn between $250,000 and $300,000 are indeed cutting back. “If they have kids in school and live in a high-tax state like New York or California, they are dropping out of country clubs and forgetting about expensive vacations,” he says. And the picture is due to get bleaker. Since January, all wages are subject to the 1.45 percent Medicare tax instead of just the first $135,000.
But don’t weep yet for the well-heeled. The Internal Revenue Service is allowing those who have to pay more under the new code to spread out the additional payments over three years, interest-free. “That helps, but it makes next year’s tax bill really staggering,” says CPA Blackman. More important, those taxpayers will still be paying off their 1993 taxes in 1996-just in time to pull out their checkbooks and make their dismay felt in the next presidential election.
