What it means
The package arrived early in a new presidential administration that had promised to cut the deficit. It combined tax increases with spending restraint, and it passed Congress by very narrow margins.
Its centrepiece was a deficit reduction plan that combined tax increases with spending cuts. On the individual side, it added new top income tax brackets.
The top personal rate rose from 31% to 39.6% on income above a high threshold, which affected only a small share of households. A new 36% bracket was also introduced just below the top one, so the rate structure became more progressive at the high end.
For companies, the top federal corporate rate rose from 34% to 35%. The package also removed the cap on the wage base to which the Medicare payroll tax applied, so that tax was charged on all earnings rather than only up to a limit.
The change was small in percentage terms, but it applied across the whole corporate sector. At the other end of the income scale, the package substantially expanded the earned income tax credit.
This is a refundable credit for working families with lower incomes, and the expansion was designed to make work more rewarding. Credits like this are paid even when they exceed the tax owed, which is what makes them refundable.
Economists still debate its effects on growth and revenue. Supporters point to the falling deficit later in the decade, while critics argue that other factors, such as strong growth, did more of the work.
The Act is often compared with later tax laws that cut rates instead of raising them. The nuance is that the title is a label rather than the official name of the law.
If you are searching legislative records, look for the Omnibus Budget Reconciliation Act of 1993, and treat the rates above as historical facts, not current ones. Always check which version of the law you are reading when comparing historical rates.
In practice
Real-world examples.
Example
A high-earning surgeon in 1993 sees the top rate on her income above the threshold rise. Her accountant explains that only the slice above the threshold is taxed at the new rate. She revisits her retirement saving to offset some of the effect. She is still taxed at lower rates on the first part of her income.
Example
A single parent working part-time receives a larger earned income credit after the changes. The credit increases her refund at tax time, and she uses the money to repay a car loan. The change illustrates the pro-work design of the credit. The extra money arrives in a single payment, which many families use for large one-off costs.
Example
A manufacturing company finds its federal corporate tax rate has risen by one percentage point. The finance director updates the forecast for future years and reviews whether planned investments still meet the required return. The change is small but affects every project. A dozen small adjustments like this are typical when any tax law changes.
Formula
Calculation
Extra tax from a rate rise = Income in the affected bracket x (New rate - Old rate)
Suppose a household in the early 1990s had $100,000 of taxable income above the new top-bracket threshold. Under the old top rate of 31%, tax on that slice was 100,000 x 0.31 = $31,000. Under the new rate of 39.6%, it was 100,000 x 0.396 = $39,600. The extra tax was 39,600 - 31,000 = $8,600, which equals 100,000 x 0.086.Case study
Seen in the real world.
Harlan Brothers Printing is an illustrative, fictional firm that was making plans just as the 1993 changes were announced. The owners expected their taxable profit to be $400,000 and had budgeted for the old corporate rate.
After the law passed, the finance manager rebuilt the tax forecast with the new rate. The change added about $4,000 to the annual bill, which was small but required an update to the cash budget.
In this illustrative story, the owners also reviewed their personal tax position. They discovered that their pay now fell partly in the higher bracket and adjusted their year-end bonus plan, taking some pay earlier than planned.
Watch out
Common mistakes.
- Searching for a law with this exact title, when the legislation was formally the Omnibus Budget Reconciliation Act of 1993.
- Treating the 1993 rates as current, when later laws have changed them several times.
- Assuming the Act only raised taxes, when it also expanded a credit for lower-income working families.
Questions
People also ask.
What was the main aim of the Act?
It aimed to cut the federal deficit by combining tax increases on higher earners with spending restraint.
Did it apply to everyone?
No, the new top personal rate applied only to income above a high threshold, so most households saw little change in their rates.
Why does it still matter?
It is a common case study in debates about the link between tax rises, deficits and economic growth.
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