Originally Published: 8/18/2010
The Bush Tax Cuts will be expiring next year. The arguments are heating up: to keep them or let them expire, or some combination of the two. I thought we ought to have all the information about taxes as we start listening to the arguments in order to sort the rhetoric from the facts and make an informed decision.
A Description of the Cuts
The Tax Policy Center has a great description of the Bush Tax Cuts. What is generally referred to as the Bush Tax Cuts is actually a series of cuts done each year from 2001 to 2006. The 2 biggest effects of the 2001 cuts were the reduction, and eventual repeal, of the estate tax (see TWW, Estate Taxes, 6/12/10) and the reduction in income tax rates. The 2002 cuts reduced the tax burden on new business investments, the main provision of which has already expired. In 2003 taxes were cut “on dividends and capital gains and accelerated the schedule for phasing in most of the other tax cuts enacted in 2001.” In 2004 the tax cuts were extended for “various provisions from the 2001 and 2003 tax cuts that were scheduled to expire before 2010, so that they remain in force through 2010.” The 2005 tax cuts are quite interesting. “The 2005 tax cuts indexed the alternative minimum tax for inflation for one year ('patched' it, in tax parlance), eliminated the income restrictions on Roth Individual Retirement Accounts (IRAs) in 2010, and extended the reduced rates on dividend and capital gains income.” Finally, in 2006, some of the 2001 tax cuts were made permanent, “including the raised annual contribution limits to IRAs, tax-free withdrawals from qualified tuition savings accounts and the savers' credit, and permanently extended rules governing education-based tax credits.” It is important to note that the Bush administration, and the Republican-controlled Congress, who together passed the income tax cuts, had them expiring in 2010. So, letting them expire is not an “increase” in taxes, but an allowing of the Republican intent to play out.
Distributional Effects of the Cuts
The Tax Policy Center also provides us with a chart entitled “Distributional Effects of Making the Bush Tax Cuts Permanent and Adjusting the AMT, 2010.” It shows that the “top 1%” of taxpayers received 98.7% of the benefits of the tax cuts. The “change in average tax rate” for the middle-income earners is a reduction of 1.8%, but the change for the top 1% was a reduction of 4.3%. One of the notes to the chart states:
Several other commonly used measures of the distributional effects also suggest that the benefits of making the tax cuts permanent would be tilted toward high-income households in general and toward households in the top 1% of the income distribution in particular. The average effective tax rate would fall more for the top 1% than for any other group. Their share of the tax cut (73.1%) would exceed their share of tax burdens in the absence of the tax cut (71.7%); as a result, their share of total federal taxes paid would decline. And the tax cut in absolute dollars is clearly far larger for high-income than for low-income groups. [Emphasis added.]
Okay, after you've gotten lost in The Tax Policy Center site with all the numbers, you know what everyone has known for years – the Bush tax cuts primarily benefit the wealthy. But, where do they stand in history? How do they compare to the historical tax rates?
Without going into the differences between regular tax rates and marginal tax rates, the changes in deductions over the years, or the differences among the various filing statuses, I will use the most common comparative statistic: the top marginal tax rates. The Tax Policy Center provides us with a great chart but for more specific information about how it was compiled, read the Note at the bottom. (If you're really interested in the lingo, check out Wikipedia's description of “tax rate.”)
According to this chart, when the income tax was first instituted in 1913 the top marginal rate was 7%. During the years of World War I and recovery from the war costs (1917 through 1921), the top marginal tax rates ranged from 67% to 73%, at which time they declined to a low of 25% in 1931. Please note that the Roaring 20s, which led to the Great Depression, had rates of 24% to 26%. During the Depression years of 1932 to 1939 the rates ranged between 63% to 79%. Then came World War II. In 1940 the top marginal tax rate shot up to 81.1% and by 1945 it was 94%. From that time the rate started coming down slowly until, in 1964, it was 77%. It bounced around a little but pretty much stayed about the same until 1982 – the Reagan Revolution – when it dropped to 50%. In 1988 under President George H.W. Bush, the rate dropped again to 26%, but he increased that slightly to 31% in 1990. (Remember his statement, “Read my lips. No new taxes.” Then he raised the taxes and it probably cost him the 1992 election.) President Bill Clinton raised the top marginal rate to 39.6% in 1993 and there it remained until 2003 when the Bush tax cuts lowered the top marginal rate to 35%, where we are today. Truth and Politics has a table of historical rates for married couples, filing jointly – the most common tax filing status – but also includes the taxable incomes for the various years. It's helpful, but confusing.
For more reading, see the Shapiro and Lee's report from 2003 that found that the overall federal tax burden on most families was at its lowest level since at least 1979. Shapiro and Lee also found that income taxes for a median family of 4 was, in 2003, at its lowest level since 1957.1
The Reagan tax cuts turned the United States from the greatest creditor nation in the world to the greatest debtor nation. Bivens2 does a remarkable job of laying out the deadly effects of his cuts. If you aren't in the mood to slosh through his research, at least look at his graph on page 2. It's an easy-on-the-eye depiction of the disaster that's been wrought. David Stockman3 refers to this policy of cutting taxes and spending like a drunken sailor as the “new Republican catechism.”
According to Stockman,3 Ronald Reagan's Director of the Office of Management and Budget, “The nation's public debt – if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 – will soon reach $18 trillion. That's a Greece-size 120% of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation's wealthiest taxpayers be spared even a 3-percentage-point rate increase.” Stockman says that the “new catechism,” practiced by Republicans for decades now, “has amounted to little more than money printing and deficit finance – vulgar Keynesianism robed in the ideological vestments of the prosperous classes.”
Effects of Letting Tax Cuts Elapse
The Tax Foundation4 sets out what it would mean if the Bush tax cuts were allowed to expire. It looks at the average middle-income family in each state and congressional district in the middle 20% of the income spectrum and compares their 2011 federal income tax liability for the extremes of policy: (1) if all the tax cuts expire or (2) if all the tax cuts are extended. “Nationally, the typical middle-income family, which has a median income of $63,366, would see its federal income tax burden increase by $1,540 if the Bush-era tax cuts expire.” Please note that this report does not take into effect President Barack Obama's proposal that the tax cuts be left in place for single filers with incomes of $200,000 or less or married filers with incomes of $250,000 or less. This is about 98% of all American households. And, please note, this refers to taxable income – after you've taken your deductions.5
A recent analysis by the Congressional Joint Committee on Taxation (JCT)5 found that if the Bush tax cuts expire, taxpayers earning more than $1 million would “still receive on average a tax cut of about $6,300” compared with what they would have paid in 2001. What this means is that the portions of the 2002 tax cuts that were made permanent are still in place and still result in less taxes owed by the wealthiest Americans than they were paying in 2001. Regarding the effects on small business owners, the JCT report also found that “less than 3% of filers with small-business income” are subject to the top 2 income tax rates. JCT also found that it would add more than $36 billion to next year's federal deficit “and transfer the bulk of that cash into the pockets of the nation's millionaires.” [Emphasis added.] Yeah. “[H]ouseholds earning more than $1 million a year would reap nearly $31 billion [of that $36 billion] in tax breaks under the GOP plan in 2011, for an average tax cut per household of about $100,000.”6
The JCT refers to the plan of letting the Bush tax cuts expire for the wealthiest and leaving them in place for everyone else as the Democratic plan. The plan to make the Bush tax cuts permanent is referred to as the Republican plan. The Washington Post compared the Democratic and Republican plans based on JCT's report that's quite interesting. It clearly shows that, for average taxpayers with income levels less than $500,000, there's very little difference in the tax cuts. Incomes up to $200,000 would get a little better deal under the Democratic plan than under the Republican plan. Incomes of $200,000 to $500,000 would cut a little better deal under the Republican plan. However, when you get to incomes over $1,000,000, the Democratic plan would give an average tax cut of $6,349 while the Republican plan would give an average tax cut of $103,835.
Proponents of extending the tax cuts claim that increasing the tax liability for the rich would result in a greater loss of jobs. It needs to be pointed out that during the total 96 months of George W. Bush's tenure – during most of which time the tax cuts were in place – only 1.08 million jobs were created. “That may sound like a lot, but compared to every other post-World War II president prior to Obama, it's the lowest average annual percentage increase in jobs created.”7 So, the Bush Tax Cuts haven't created any jobs yet. Why would getting rid of them cause a loss of jobs?
Historically, the only time the tax rates have been as low as they are now was in the 1920s – the years leading to the Great Depression. People who complain about how much they pay in taxes are simply being greedy. No person now alive has ever paid so little. And we know the effects of drastic tax cuts – a nation severely in debt and not creating jobs to stimulate the economy and tax revenues.
We also know that those of us working are not in a position to pay more in taxes. Thus, the so-called Democratic plan leaves the tax cuts in place for 98% of us. Only the very wealthy would have their taxes increased. And that increase is only 3%. Given the free ride they've had for almost 10 years you'd think they'd willing put out that 3% to help the country that made them so rich.
3 Stockman, David. Four Deformations of the Apocalypse. The New York Times, July 31, 2010.
4 Data Anlysis Division. Effect of Expiration of Bush-Era Tax Cuts on Average Middle-Income Family, by State and Congressional District. Tax Foundation Fiscal Facts No. 238, August 1, 2010.
5 Calmes, Jackie. Study Looks at Tax Cut Lapse for Rich. The New York Times, August 10, 2010.
6 Montgomery, Lori. GOP Play to Extend Tax Cuts for Rich Adds $36 Billion to Deficit, Panel Finds. The Washington Post, August 12, 2010.
© The Issue Wonk, 2010