How did income tax rates change under President Obama relative to President Bush? The answer is: not much, except for the tax rate that applied to the highest income bracket. The tax rates that were in effect under President Obama were generally derived from the “Bush Tax Cuts” that were implemented in 2003.
Under President Bush, there were 6 tax brackets. Under President Obama, the number of tax brackets was expanded to 7. The tax rates that applied to the tax brackets were the same under each president, with one exception. The only thing that changed under President Obama was the addition of a 39.6% top tax rate that applied to a new top tax bracket. Why 39.6%? That had been the top tax rate that applied to the highest tax bracket under President Clinton. Relative to President Clinton, tax rates that applied to each tax bracket were lowered under President Bush. The tax cuts implemented under President Bush were initially scheduled to end in 2010, which meant that tax rates would have reverted to the higher rates that existed under President Clinton. However, Congress approved keeping the rates in place under President Obama, the only exception being the increased rate for the highest tax bracket.
In addition to lowering tax rates by income bracket, the Bush Tax Cuts also lowered taxes on certain dividends (cash payments to shareholders) and long-term capital gains (gains on financial assets). Dividends were formerly taxed at an individual’s ordinary tax rate (the ordinary tax rate is the tax rate that applies to your tax bracket); under President Bush the dividend tax rate was reduced to 15% for “qualified” dividends, basically dividends on stock that was held for a required minimum time period. The long-term capital gains tax rate was reduced from 20% to 15% (5% in tax brackets of 10% and 15%). These rates, implemented under President Bush, generally remained in place under President Obama. The long-term capital gains and qualified dividend tax rate was increased to 20% for taxpayers in the 39.6% marginal tax bracket and an additional net investment income tax of 3.8% was applied on the capital gains of high-income earners.
The standard deduction and exemption amount were relatively the same under President Obama relative to President Bush, with the amounts each year generally adjusted slightly by the approximate rate of inflation.
In summary, not much changed under President Obama relative to President Bush in terms of individual income tax rates, except for taxpayers in the highest income bracket. The tax rates applicable to each tax bracket remained the same, except a new, top income bracket was added that was subject to a 39.6% rate. The tax rate on qualified dividends and capital gains generally remained the same, although an investment tax surcharge of 3.8% applied to investments of high-income earners and the long-term capital gains and dividend tax rate increased to 20% for taxpayers in the highest income bracket.
CBEI Blog Series: Income Taxes – Bush vs. Obama vs. Trump
Part 1: Intro
Part 2: Federal Individual Income Tax Overview, How it Works
Part 3: President Obama vs. President Bush
Part 4: President Trump vs. President Obama
Part 5: Corporate Incomes – Briefly but Importantly
Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point.