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Taxes And Consequences: Barack Obama's Tax Plan For Wall Street

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It's official: Wall Street loves Barack Obama. In 2007, even before he became widely-recognized as the front-runner for the Democratic nomination, Obama pulled in a total of $1.7 million from employees at 12 major Wall Street firms, according to a survey by the McClatchy news agency. Those numbers included $288,835 from Goldman Sachs, $242,395 from UBS and $226,805 from Lehman Brothers. He's reportedly doing even better now that he has pulled ahead of Hilary Clinton in most polls. Money from hedge funds and private equity funds is pouring into his campaign coffers.
Well it's a good thing that Wall Street loves giving money to Obama because if he gets elected, employees at Wall Street firms will be sending much larger checks his way thanks to tax increases. Obama has promises to end the Bush tax cuts. "That is a 3% bump across the board to the bad old days when associates faced a marginal federal tax rate of 36%," Ted Frank wrote on our sibling blog AboveTheLaw when he analyzed the tax effects of Obamanomics on law firm associates.
We decided to take Frank's analysis and apply it to Wall Street. Specifically, we decided to look at the effect of Obamanomics on an associate at an investment bank in his first year out of business school. Let's say that a first-year post-MBA associate is paid about market rates for a Wall Street firm, taking home $105,000 in salary and $175,000 in bonus. Like Frank, we'll assume he's generous, and gives $10,000 a year to charity.
The biggest tax effect comes from Obama's plans to end the social-security tax cap. Current law caps social security taxes at $102,000. Obama plans to abolish this, meaning the full salary and bonus will be subject to social security taxes. That adds several thousands of dollars to the associate's tax bill.
As Frank notes, that's not the only place associates will feel the higher tax bill. They'll likely feel it in smaller bonuses as well. Social-security taxes are not only on employees. The government also charges 6.2% to employers that employees never see on their W-2s. But, of course, their employers noticed this hit and it shows up in compensation costs on balance sheets that shareholders will see too. Even if we assume that employers are willing to swallow half of the extra cost of uncapped social security taxes, the bonus for the associate will decline by around $5000.
The overall effect of Obama's tax hikes is breathtaking. The first year associate's marginal tax rate goes up from an already ridiculous 42.5% to 51.4%--not including the new 6.2% marginal tax on the employer. Add in the effects on the bonus, and the associate is losing nearly $20,000/year in take-home pay.
Frank has helpfully added a third column to his chart: how big a pay cut would you have to take to receive the same take-home income? The answer is that Obama's tax increases have a bigger effect on your income than a Wall Street firm cutting New York salaries by $34,000.
See the effect charted after the jump.