The Tax Policy Center has just published a report (click here) detailing the stakes in the debate over extending the tax cuts enacted by Congress in 2001, after George W. Bush became president, and again in 2003, when tax rates were lowered to 15% on capital gains and dividends.
First, let's review a few tax rules enacted in the past few decades and proposals on the table to cut taxes or extend the tax breaks beyond the congressional expiration date, with an estimate by the Policy Center of how much each proposal would cost in lost revenues for the federal government.
1. AMT: originally, the Alternative Minimum Tax was imposed by Congress on the wealthiest income earners, many of whom were escaping the taxation system altogether through various loopholes. Until 2000 the AMT applied only to the wealthiest 1% of workers. However, with inflation, it began to apply to more and more persons, projected to rise up to 20% of taxpayers in 2010. There is now a proposal to index the AMT so that it will only affect the wealthiest 1% of Americans. Cost in federal revenues of this proposal: $66 billion.
2. 10, 25, and 28% rates: In 1988 the top tax rate for any income was set at 28% (down from 50% in 1986). Since that time the top tax rates went up to 39.6% in the 1990s, and then down to 35% during the Bush years. There is now a proposal to go back to rates of 10, 25, and 28% for all but the highest incomes, which would basically extend tax cuts for lower and middle-level income earners. Cost of this proposal in federal dollars: 121 billion
3. Marriage penalty relief: in 1969 Congress imposed higher taxes on some married couples than they would have paid had they both been single; by 1996 46% of couples were paying more, and the marriage penalty was eased up in 2001 and 2003, but the relief is scheduled to elapse at the end of 2010. There is a proposal to extend the relief. Total cost in federal dollars: $32 billion.
4. Expanded tax credits: Because of the recession certain tax credits were enacted in 2009 to help stimulate the economy, particularly beneficial to middle class families. There is a proposal to continue these. Cost: $29 billion.
5. Tax dividends like capital gains and lower rates for bottom tax brackets: there is a proposal to treat dividends like capital gains, instead of like income as they are now, and to lower rates on the bottom tax brackets. Cost: $24 billion
6. Extend estate tax at 2009 level. Until George Bush came along, estates were taxed if they exceeded $1 million. These were taxed at a rate of 37% going up to 55% for wealthier estates. Bush enacted a gradual estate tax cut such that in 2009 estates were not taxed unless they exceeded $3.5 million, at a rate of 45%. This year, 2010, there is no estate tax at all, so if you are going to die, this is a good year to do it, for your heirs' sake. After that, Congress agreed to go back in 2011 to the pre-Bush tax rates for estates over $1 million. There is a proposal to keep the estate tax where it was in 2009. Cost: $26 billion.
7. Lower rates on dividends and capital gains. Under sunset provisions long-term capital gains taxes are scheduled to go up from 15% to 20%, except for lower-income brackets, which are scheduled to be taxed at 10%. Currently, long term capital gains are taxed at 15% except for lower-income brackets, where the tax rate is zero. Dividends, which are currently taxed at 15% (zero for low-income brackets) are scheduled to be taxed in 2011 as ordinary income. There is a proposal to keep the rates at 15% for dividends and capital gains. Cost: $11 billion.
8. Repeal PEP and Peale for upper income brackets: Twenty years ago there was a phase-out of personal exemption deductions and itemized deduction values for upper income brackets which ended in 2010. The Obama administration budget reinstates the PEP and Peale limitations on single individuals earning over $200,000 and couples with AGI over $250,000. There is a proposal to repeal PEP and Peale limitations for upper income brackets. Cost: $21 billion.
9. Extend 33 and 35% tax rates: The 2003 tax cuts to wealthier Americans are scheduled to expire. Under these cuts the top rates fell from 27% to 25%; from 30% to 28%; from 35% to 33%; and from 38.6% to 35% for the wealthiest tax bracket. These are scheduled to go up to 28%, 31%, 36%, and 39.6%. There is a proposal to extend the 33 and 35% tax rates to the wealthiest Americans. Cost: $36 billion.
If none of these proposals should go into law, the federal government would be richer by an estimated $366 billion per year. But this is unlikely. The administration, according to the Tax Policy Center, has a plan to give tax breaks to all taxpayers, starting out with about $69 and $583 to the lowest two income brackets averaging incomes of $11,600 and $28,852, respectively. Taxpayers averaging incomes of $52,224 and $88978 would get breaks averaging $1016 and $2124, respectively. Taxpayers in the 80-90% bracket, with incomes averaging 138,385, would get a break of $4032; taxpayers in the 90-95% income range would get a break of $5508; and taxpayers in the 95-99% range (ave. income=$345,574) would get a break of $8809. Taxpayers in the 99-99.99% range, averaging $1,098,290 in income, would get a break of $14,022, and the richest one-in-a-thousand taxpayer, incomes averaging $8,367,274, would get a tax break of $61,510.
Republicans, who cry crocodile tears about the huge deficits piling up, recommend giving the very wealthiest Americans major tax breaks by keeping the top tax rates at 33% and 35%, repealing PEP and Pease for the rich, and lowering the tax on dividends and capital gains back to 15%. The Tax Policy Center estimates that these lowered taxes would raise the deficit by $68 billion per year and put $310,140 into the pocketbooks of the richest one-in-a-thousand, whose incomes average $8,367,274. Just what you need if you make over $8 million, right? Another $310,000 welfare check from Uncle Sam during the worst recession since the Great Depression.