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Wednesday, August 11, 2010

What Impact Will the Bush Tax Increases Have on High Income Households?

The Bush tax increases are scheduled to hit all households in 2011. If low income households are exempted, as they should be, what will happen to tax revenue?:

Study Looks at Tax Cut Lapse for Rich, by Jackie Calmes, NY Times: As debate heats up over President Obama’s proposal to let the Bush tax cuts expire for the wealthy but to extend them for everyone else, a nonpartisan Congressional analysis circulated on Capitol Hill on Tuesday provides a look at the impact the plan would have on high-income taxpayers. ...
The president has vowed to extend the tax cuts for individuals with less than $200,000 in annual taxable income and couples with less than $250,000 — about 98 percent of American households. About 315,000 households report adjusted gross income of $1 million or more.
Taxpayers with income of more than $1 million for 2011 would still receive on average a tax cut of about $6,300... That compares, however, with the roughly $100,000 average tax cut that households with more than $1 million in income would receive under current rates.
Filers with taxable income of $500,000 to $1 million would still get on average a tax cut of $6,700 compared with pre-2001 rates... But that compares with roughly $17,500 if the top Bush tax rates were maintained.
If the president gets his way, in 2011 the top two income tax rates — now 33 percent and 35 percent — would revert to the levels before the Bush administration, 36 percent and 39.6 percent, respectively. But the four lower rates would remain 10 percent, 15 percent, 25 percent and 28 percent. ...
Democrats want to extend the tax cuts for all but the wealthy, while Republicans are fighting to maintain them for everyone. ... Extending them for the next 10 years would add about $3.8 trillion to a growing national debt... About $700 billion of that reflects the projected costs of tax cuts for those in the top 2 percent of income-earners. ...
Speaking of Republicans at a fund-raiser in a wealthy community near Dallas on Monday, Mr. Obama told Democratic donors, “What you see is a governing philosophy on their part that basically comes down to ‘We’re going to extend tax cuts for the wealthiest among us’ — folks who don’t need those tax cuts and weren’t even asking for them, which would cost $700 billion.”
For their part, Republicans do not emphasize the impact of extending the tax cuts for wealthy individuals. Rather, they say Mr. Obama is about to spring a big tax increase on many small-business owners who file their taxes as individuals. Analyses from the Joint Committee on Taxation and the Tax Policy Center ... show that less than 3 percent of filers with small-business income pay at the top two income tax rates, and many of those are doctors and lawyers in partnerships.

I have no objection to the tax cuts being allowed to expire for high income households, it will come largely from savings so there won't be a big impact on consumption. But as I've argued before, so long as the economy continues to have problems, the revenue gained from allowing the tax cuts to expire for high income households should be used to finance temporary tax cuts for lower income households. Those households are likely to spend the money instead of saving it, so the net effect will be a needed boost to consumption and aggregate demand (that is, this takes advantage of differences in the marginal propensity to consume). Since the tax cuts for lower income households would end once things improve, the policy would still help with the long-run budget problem.

    Posted by on Wednesday, August 11, 2010 at 01:18 AM in Budget Deficit, Economics, Fiscal Policy, Income Distribution, Taxes | Permalink  Comments (68)


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