The Pease Amendment came into play for high income taxpayers this year once again, after a bit of a hiatus. The Pease Amendment was passed as part of the Omnibus Budget Reconciliation Act of 1990, and named after Congressman Donald Pease, who introduced it. This rule provided that if your adjusted gross income (AGI) passed a particular threshold, then some deductions would be reduced on your taxes — thereby curbing your ability to limit your tax liability.
This rule has the effect of increases tax rates for those individuals by 1.2% — therefore a tax rate that was 39.6% became 40.8%. The way it was done is patently criminal because it uses the tax system to incorporate a complicated formula to hide the fact you are raising tax rates. There is no rational or logical reason for a formula like that to be used unless its intent was to deceive.
Acknowledging the irrationality of the Pease Amendment, Congress slowly scaled it back and then eliminated by 2010 after the Economic Growth and Tax Relief Reconciliation Act of 2001. During 2010 session, Congress passed the 2010 Tax Relief Act which extended the elimination of the Pease Amendment, but only through 2012.
By that time, it was understood that the tax reductions of 2001, including across-the-board rate reductions, the Pease Amendment and Personal Exemption Phaseouts (PEP) would all be gone forever. And yet, Congress declined to extend the Pease Amendment elimination further past 2012 which meant that 2013 saw a return to the previous Pease Amendment rules that existed before 2001.
Also during that time in 2012, Obama insisted as a revenue-raising measure that the rates in the Bush tax cuts be reinstated for the high income earners in 2012. This is a simple, straight-forward tax hike. But in an action that can only be considered mean spirited, and counter to any attempt to simplify the tax laws, Obama personally insisted that both the Pease Amendment and the similarly convoluted Personal Exemption Phaseouts (PEP) be reinstated for high network individuals. Their reintroduction into the tax code by Congress is unconscionable.
The tricky thing about the Pease Amendment is that it actually has very little to do with deductions, because the trigger to implement it is based on earned income thresholds. Eliminating deductions based on income — which then affects the amount of increases tax paid — is underhanded.
Coming on the heels of the actual margin rate increase in 2012 when rates for highest earners reverted to the 39.6% rate of the Clinton years, many taxpayers found themselves with even higher tax bills in 2013 without an actual tax increase due to re implementation of the Pease Amendment. The result of the rule ensured that wealthy taxpayers were squeezed just a little bit more for their “fair share” — now nearly 41% on income tax alone.
The Pease Amendment carefully obfuscates the net effect of raising taxes without having to actually do so. Perhaps the most interesting thing about the amendment is that Pease’s only claim to fame as an eight-term Congressman is that he is responsible for writing a tax rule that tricks people into paying more taxes than they believed they were paying.