The Bush tax cuts have become the central issue of the 2010 midterm elections, yet much of the electorate has a fundamental misunderstanding about what the Bush tax cuts did and what will happen to the tax cuts after 2010. The partial or full extension of the Bush tax cuts will have a dramatic impact on the overall economy, the deficit, and the pocketbooks of nearly every American. Each political party has a very different view on what to do with the Bush tax cuts, and the midterm elections will likely decide what happens to the cuts in 2011. For these reasons, it seems prudent for the American voting population to inform themselves on the basic facts and arguments behind the Bush tax cuts. This article will attempt to provide that basic summary. It may not be as fun as reading about Lindsey Lohan’s most recent failed drug test, but the following reading will be much more important to the lives of Americans in the near future.
What did the Bush Tax Cuts do?
The Bush tax cuts that were passed in 2001 an 2003 cut taxes in many different ways. The most important of these cuts came in the form of lowering the tax rates for all Americans. The Bush tax cuts lowered the income tax rates in the following manner:
– A new 10% tax bracket was created. This effectively lowered taxes of people who previously found themselves in the “bottom” 15% tax bracket. In 2010 the first $8,375 of a single individual’s income will be taxed at 10%. Income earned between $8,375 and $34,000 will be taxed at 15%.
– The 28% tax bracket was lowered to 25%. In 2010 income earned between $34,000 and $82,400 will be taxed at this 25% rate.
– The 31% tax bracket was lowered to 28%. In 2010 income earned between $82,400 and $171,850 will taxed at this new 28% rate.
– The 36% tax bracket was lowered to 33%. In 2010 income earned between $171,850 and $373,650 will be taxed at this 33% tax rate.
– Finally, the top tax rate was lowered from 39.6% to 35%. In 2010 all income earned over $373,650 will be taxed at this 35% rate.
In addition to these changes, the Bush tax cuts also greatly reduced the estates tax (a tax on inheritances over $1,000,000), the capital gains tax (tax on profits from selling stocks), and reduced the Alternative Minimum Tax (the AMT is designed to make sure the rich pay a certain “minimum” tax since many could escape tax liability through exemptions and deductions).
Why does this matter now?
The Bush tax cuts have a ten-year expiration date, so this means that in 2011, if Congress does nothing, the “old” rate will return. For example, individuals previously taxed in the 25% bracket would be taxed at 28% in the year 2011 for their income earned between $34,000 and $82,400. The results would not be slight. For example, a family of four with a household income of $50,000 would see their tax liability raise $2,900 if at least part of the Bush tax cuts are not extended.
Why are the Bush Tax Cuts set To expire?
When they were passed, the Bush tax cuts were very controversial. Critics argued the tax cuts provided much of the benefit to the rich, and that the cuts would greatly increase the federal deficit. In the Senate, the “Byrd Rule” prevents any bill from being passed with less than 60 votes, if the bill will increase the deficit over more than 10 years. President Bush and Republicans did not have the 60 votes they needed to overcome the Byrd rule, so instead they passed the tax cuts using reconciliation (the same tactic used to pass health care reform). Reconciliation allows the law to be passed with only 51 votes in the Senate. However, in order to avoid the Byrd rule, the Republicans also had to put a ten-year time limit on the Bush tax cuts. As a result, if no action is taken, all the Bush tax cuts will go away in 2011.
What do President Obama and the Democrats want to do?
President Obama and the majority of Democrats have announced their intention to extend the Bush tax cuts for the poor and middle-class, while not extending the cuts for the “rich.” The Democrats define “rich” as individuals making over $250,000 or more. About 97% of the American population makes less than that amount each year. If the Democrats have their way, the tax rates would remain at their current rates for all income earned up to $250,000 for a single individual, and taxed at the “old” 39.6% rate for all income earned above $250,000. Under this proposal, even Bill Gates would see a lower tax rate for the first $250,000 he earns each year (likely in the first few hours of January 1st, 2011).
What do Republicans want to do?
Republicans have expressed their intention to extend all the Bush tax cuts, including the cuts for individuals in the top tax bracket. Republicans have threatened to vote against any bill which does not include an extension of tax cuts for the “rich”, in addition to the middle-class tax cuts. Republicans also favor doing away with the estates tax permanently, along with lowering the capital gains tax.
Who will win?
That is (literally) the trillion dollar question. Right now Democrats hold the advantage because they control the White House and have significant majorities in the House and Senate. Republicans will have significantly more bargaining power if they gain a majority in the House and/or Senate. However, even if Republicans were able to gain a majority in both chambers of Congress, they likely would not be able to overcome a presidential veto (which requires a two-thirds super majority to override). Many believe this conflict could create another government shutdown like the country saw in 1995 when a Republican-controlled Congress fought with President Clinton.
What are the Democrats’ arguments?
Democrats argue the Bush tax cuts were a bad idea when they were passed and to extend them would be an even worse idea. They point out that much of the benefit from the Bush tax cuts went to the rich and not to the poor. The following facts support this position:
– Approximately 67% of the funds from the Bush tax cuts went to those in the top 20% income bracket in America.
– The after-tax income of the top 1% of income earners went up 139% after the Bush tax cuts were passed. The middle-class saw their incomes rise only 17% during the same time period.
– The tax liability for an individual making between $30,000 and $40,000 went down by about $825 because of the Bush tax cuts. By comparison, the tax liability for an individual making between $500,000 and $1,000,000 went down by an average of $22,485.
Democrats also argue that the Bush tax cuts greatly increased the deficit. They point out that before the tax cuts were passed, the United States had a budget surplus, which could have been used to pay off the federal debt. Since the Bush tax cuts were passed, the federal tax revenues have fallen, and federal deficits have greatly increased, contributing to our current overall debt. The Congressional Budget Office analyzed the Republican plan to extend all the Bush tax cuts and determined that the measure would increase the federal deficit by $4 trillion over the next ten years.
Finally, Democrats argue that the tax cuts for the rich represent a poor way to create economic growth. While willing to pass tax cuts for the middle-class, Democrats argue that tax cuts to the rich will not “trickle down” to the poor and middle-class, and that an extension of these cuts will create unmanageable federal deficits in the future. To support their case, they point to the testimony of economist Mark Zandi, who demonstrated that the Bush tax cuts would only provide 0.29 of a “multiplier effect” (generating 0.29 cents of growth for every $1.00 spent), whereas measures like food stamps would generate a 1.79 multiplier effect (generating $1.79 of economic growth for every $1.00 spent).
What are the Republicans’ arguments?
Republicans argue that now is the wrong time to increase tax rates on anyone including the “rich” in society. To support their argument, Republicans point out that the increased tax rate just on the rich could affect many small business owners. When their tax rates are raised, these individuals would presumably be less likely to hire more workers or make investments in their business that might create more economic activity. Some of the best evidence to support the Republican argument is presented here.
Republicans also argue that the federal deficit increased for many reasons outside of the Bush tax cuts. In addition to the Bush tax cuts, the economic downturn, wars in Iraq and Afghanistan, and increased federal spending have all contributed to the deficit. They argue that decreasing spending is the way to solve deficit problems, as opposed to allowing any of the Bush tax cuts to expire.
In the end, nearly everyone agrees to extending at least part of the Bush tax cuts. The real question is whether to extend some or all of the cuts. Everyone also agrees that extending any of the cuts will decrease government revenue in the future, and neither Democrats or Republicans have come up with a way to pay for that loss of revenue. Practically, that means the country can look forward to continued deficits for many years to come. Whether people believes the tax cuts for the rich are necessary for economic growth ultimately depends on their larger economic philosophy. Those who believe that “trickle down economics” works likely favor the tax cuts for the rich. Those who believe that too much wealth is becoming too concentrated – to the detriment of the poor and middle-class – would likely favor getting rid of the Bush tax cuts.