ROBERT SIEGEL, HOST:
President Obama praised the cliff-dodging deal last night, saying it delivers on a central promise of his campaign.
PRESIDENT BARACK OBAMA: Thanks to the votes of Democrats and Republicans in Congress, I will sign a law that raises taxes on the wealthiest 2 percent of Americans.
SIEGEL: That 2 percent figure has long been the president's shorthand for Americans making more than $250,000 a year. As we've reported, the congressional compromise uses a higher threshold. Only income above $400,000 for individuals or $450,000 for couples will be subject to higher tax rates. Less than 1 percent of Americans fall into that higher income category. But the fine print of the deal will also mean higher taxes for a slightly larger group of wealthy Americans, keeping that $250,000 figure in play. NPR's Scott Horsley joins us now to explain that. And Scott, is the president therefore right when he says that he's raising taxes on the top 2 percent?
SCOTT HORSLEY, BYLINE: Robert, yes, he is. Even though higher tax rates only kick in for income over 400 or 450 thousand dollars, this deal will raise tax bills for individuals making as little as a quarter million dollars. That's because it reinstates some old limits on tax breaks for people in that high income category, so more of their income will be subject to tax.
SIEGEL: And what tax breaks are we talking about here?
HORSLEY: Well, they're the same tax breaks that you and I receive, namely the personal exemption and itemized deductions for things like mortgage interest or gifts to charity. But historically those breaks have been limited for the very wealthy, the idea being they didn't need a tax break as much as the other 98 percent of us, and the extra revenue that the government would bring in would help to balance the budget. These limits go by the colorful names of PEP and Pease. PEP is an acronym. It stands for Personal Exemption Phaseout. So as your income goes up, that tax break gradually phases out. Pease is - that's P-E-A-S-E - it's named for former Ohio Congressman Don Pease. It whittles away at the value of itemized deductions. So the more money you make, the less of a tax break you get for your home mortgage interest or gifts to charity.
SIEGEL: This sounds a little bit like what Mitt Romney proposed during the presidential campaign - capping deductions, he said.
HORSLEY: Well, it works in a similar way, but unlike that cap that Governor Romney proposed, which could've had the effect that maybe you used up your entire allotment of itemized deductions just with your home mortgage interest and maybe your local and state taxes, and then you would get no tax break for charitable giving, for example; what this does is you still get a tax deduction for every dollar, but the value of that deduction slides down as your income goes up. And at the very high end, your deduction could be worth just maybe 20 cents on the dollar.
SIEGEL: So if you have, say, a total of $30,000 in itemized deductions, if you make less than a quarter of a million dollars a year, you may get the full benefit of those. If you make a lot more than that, you could get 90 or 70 percent of them and ultimately as little as 20 percent.
HORSLEY: That's right. It gets whittled away, but there's still an incentive for, for example, charitable giving. It's just a smaller incentive than there would be at a lower income level.
SIEGEL: Now, you said this deal reinstates these limits. They're not actually new.
HORSLEY: No, these were first put in place back in the '90s and then gradually phased out over the last decade as part of the Bush-era tax cuts. They were always due to come back into force with the new year, and under this deal they will come back into force. But they'll actually take effect at a higher income level than would've happened automatically and a higher level than the president first proposed. So here, as elsewhere in the tax deal, the president is actually settling for a smaller tax increase on the wealthy than he could've gotten automatically. But the White House can plausibly say Mr. Obama is insisting on a bigger tax contribution from the wealthiest 2 percent.
SIEGEL: Scott, thank you.
HORSLEY: My pleasure.
SIEGEL: NPR White House correspondent Scott Horsley. Transcript provided by NPR, Copyright National Public Radio.