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The Problem with PEP and Pease
This content is provided by the Americans for Tax Reform Foundation.
The Personal Exemption Phaseout (PEP) is a tax provision that cuts the value of a filer’s personal exemption by 2% for every $2,500 that the filer’s AGI exceeds a certain high-income threshold.
The Pease limitation is a provision that slashes a filer’s itemized deduction by 3% of the amount that the filer’s AGI exceeds a certain threshold. The limitation can strip away up to 80% of the value of a taxpayer’s itemized deductions.
The 2001 tax act disposed of the Personal Exemption Phaseout and Pease limitation gradually over half a decade beginning in 2006, so that both were eliminated by 2010.
Both PEP and Pease will be reinstated when EGTRRA sunsets on January 1. For an unmarried filer, both provisions will kick in once AGI exceeds $174,450. That taxpayer’s personal exemption will be completely phased out after $296,950 of AGI.
The PEP and Pease provisions are stealth tax increases on high-income earners, most of whom are net job creators.
As if the expiration of the 2001/2003 tax relief wasn’t bad enough, Pease will ratchet up the effective tax rates on ordinary income, capital gains, and dividends by an additional 1.2% if allowed back from the grave; the top effective rates for these taxes will become 40.8%, 25.0%, and 44.6%, respectively. To make matters worse, the Pease limitation will apply to the 95% of small businesses that file through their owners, constituting a 1.2% tax hike on small employers.
The Personal Exemption Phaseout serves to penalize success. The Pease limitation, for its part, penalizes individuals who qualify for deductions, such as those who contribute large sums of money to charity.
Indeed, the Pease limitation is considered a key provision by those who want to put a cap on certain deductions, especially the charitable deduction. Its reinstatement will discourage individuals with means from contributing to charity.
The Personal Exemption Phaseout and Pease limitation are nothing more than class warfare tax hikes that will soak $165 billion out of the private economy in ten years. They should be put to rest for good.
10-Year Cost to Taxpayers
U.S. Department of the Treasury (Pease): $123 billion
U.S. Department of the Treasury (PEP): $41.9 billion