Bush/Obama tax cuts: both plans extend the tax cuts for most Americans
Adam Looney at the Brookings Institution has a nice new on the Bush tax cuts. It can be summarized in this picture:
As Adam notes, the argument we are having is 鈥渨hether to extend all of the tax cuts or merely to extend the vast majority.鈥� Or, to put it a slightly different way: Do we want to 鈥渆xtend an extra $310,000 in tax relief to the wealthiest 120,000 taxpayers or 鈥nstead make a relatively small down payment toward fiscal responsibility?鈥�
As Adam鈥檚 graph (and the Tax Policy Center analysis upon which it is based) shows, the highest 0.1% of earners (average income $8 million) would still benefit, to the tune of more than $61,000, even if the top rate is increased from today鈥檚 35 percent to 39.6 percent, as President Obama prefers. How would they get a $60,000+ tax cut, relative to current law, if their rates are increased?
There are two big reasons. First, remember that Obama would extend the Bush tax cuts for income of $200,000 or less ($250,000 for joint filers). Thus, high-earners would still enjoy the benefits of lower rates on their first few hundred thousand dollars of income. They would also benefit from Obama鈥檚 proposal to tax dividends at 20 percent since that levy would rise to 39.6 percent (the same as the top rate on ordinary income) if the Bush tax cuts are allowed to expire.
Now, keep in mind that Obama鈥檚 plan to extend the 2001 and 2003 tax cuts for nearly all--as opposed to all鈥攚ould still add trillions to the deficit over the next decade. When Adam says the Obama plan would make a 鈥渟mall down payment toward fiscal responsibility鈥� he means it would make the deficit less bad鈥攔elative to current law鈥攖han extending the tax cuts for everyone, including the highest earners. Still, in today鈥檚 political environment, adding $3 trillion to the deficit over the next decade is better than adding $3.7 trillion.
My view (which Adam does not necessarily share) is that given budget realities, Obama is wrong to propose extending the Bush tax cuts indefinitely for as many people as he does. I'd lower the threshold even further--perhaps to $150,000--and continue the tax cuts for only a year or two. But in any event, do we really want to extend them for a handful of the very highest earners as well?
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