Today President Obama called for a one-year extension on the Bush tax cuts for the middle class. In contrast, he wants to raise the top two income tax rates from 33% and 35% to 36% and 39.6%, respectively. These higher rates would affect those making more than $250,000 a year.
So here’s the big question of the day–should we (1) leave rates alone, (2) increase just the two top rates as Obama has proposed, (3) expire all of the Bush tax cuts, including those for the middle class, or (4) take some other approach?
I’m looking for your feedback in the comments below. To help the discussion, let’s make sure we have all the facts.
Facts about the Bush Tax cuts
- It was multiple tax cuts, not just one. There were a series of tax cuts enacted from 2001 to 2006. When most speak of the “Bush Tax Cuts,” they are referring to the 2001 and 2003 bills that lowered income tax rates and accelerated the implementation of these new rates. But the tax cuts affect a lot more than just our tax brackets.
- The tax cuts lowered income taxes for everybody–
The 15% tax bracket was reduced to 10%
The 28% tax rate was reduced to 25%
The 31% tax rate was reduced to 28%
The 36% tax rate was reduced to 33%
The 39.6% tax rate was reduced to 35%
You’ll find a great chart showing all of the changes here.
- As noted above, the tax cuts affected a lot more than tax brackets. The child tax credit was increased from $500 to $1,000. The tax rate on long-term capital gains earned by middle- and upper-income people was reduced from 20% to 15%. And the tax rate on qualified dividends earned by middle- and upper-income people was reduced from ordinary income tax rates to 15%. There were other tax cuts as well
- The cost of the Bush tax cuts is unclear. Part of the difficulty comes when you try to calculate the revenue-producing affect of tax cuts. The liberal Citizens for Tax Justice calculated the cost of the cuts at 2.5 trillion, which included interest on the lost revenue. But it did not account for how the cuts changed behavior (e.g., increased consumer spending) that would offset some portion of the lost revenue. The tax foundation put the actual cost at between $1 trillion and $1.7 trillion.
- The tax cuts were temporary because Republicans couldn’t get the support they needed in the Senate unless they conceded this point. They wanted the cuts to be permanent.
- How much revenue would expiring the tax cuts generate? This is perhaps one of the most important questions. It’s difficult to answer. For starters, when taxes go up, people change their behavior. Perhaps they spend less or work more (or less if jobs become even more scarce). So the net affect of a tax increase of this magnitude is difficult to gage. But the CBO has made its best estimate. If we let the tax cuts for the wealthy expire, it will increase tax revenues by about $678 billion over 10 years. If we let all of the Bush tax cuts expire, we’ll generate a total of about $3.7 trillion in additional revenue over the next decade.
I’ve said this before and I’m sure I’ll say it again–our government should not take another nickel from any of us, rich or poor, unless it is part of a comprehensive plan to address our fiscal mess. That would include addressing medicare, social security, our deficit and debt, and unemployment. Simpson-Bowles would be a great place to start.
The rhetoric about raising taxes on the “rich” is dividing our country. The wealthy certainly need to pay their fair share. By many measures, they are. But we could argue over fairness all day long. The more important question is how our we going to implement sustainable solutions to our fiscal challenges. Increased taxes may be part of a reasonable solution, but only a part. Why do we only hear about raising taxes on the rich? What about all the other tough choices that must be made? I think we need politicians who care more about our future than theirs.
Unlike many conservatives, I’m not opposed to modest tax increases. But any tax increase should be part of a solution, not populist drivel designed to win another election. (The Buffett Tax fits nicely into this drivel category.) And yes, I feel the same way about Romney’s ridiculous proposal to cut tax rates by 20 percent. Pure silliness. It almost makes you wish for the return of President Clinton.
That’s my view. What’s yours?