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Bush tax cuts should expire for upper earners.

Welcome to VoteFacts.org.  Today we are taking a look at the hot subject of allowing the Bush tax cuts to expire for upper income earners.  To learn as much as you can about that, we are giving you statements from the Congressional Budget Office (CBO) and the Congressional Research Service (CRS):

The Congressional Research Service (CRS)

The Bush tax cuts were provisions—enacted into law primarily in 2001 and 2003—which gradually reduced individual income and estate tax liabilities between 2002 and 2010.   These tax cuts were extended for 2011 and 2012.  Notably, the 2010 Tax Act was enacted under President Obama, not President Bush, although the underlying policy is still commonly referred to as the Bush tax cuts.

When the Bush tax cuts were originally proposed, proponents stressed that by reducing marginal tax rates, this policy would lessen some of the distortions taxes had on work, saving, and investment, ultimately boosting long-term growth.  For example, by reducing marginal tax rates, individuals would have more take-home pay, theoretically incentivizing them to work more.  Ultimately, this increased economic activity would boost long-term economic growth.

Some critics have sought to disprove this theory by comparing historical growth rates and marginal tax rates in the United States. They argue that in periods when taxes where raised (the mid to late 1990s for example), growth was higher than in periods when taxes were cut (the 2000s for example). However, comparing growth rates during periods with different tax rates does not necessarily prove that tax policy did not impact growth since a variety of other factors, aside from tax rates, differ between these time periods. The results of many economic studies, have shown that tax cuts generally do affect growth (and components of growth). They have also generally shown, however, that the impact of tax cuts on growth is small in relation to the foregone revenue resulting from the cut.

Opponents of the Bush tax cuts highlight both their high cost as well as the fact that most of the benefits go to upper-income taxpayers.  Estimates indicate that approximately two-thirds of the benefits of these cuts accrued to the top 20% of taxpayers with the highest income and over one quarter (26.5%) of the benefits of the Bush tax cuts accrued to the top 1%.  By contrast less than a fifth of the benefits (16.5%) accrued to the bottom 60% of taxpayers.  Critics charge that this distribution of benefits is “unfair.”

In response, supporters of the tax cuts approach the “fairness” of the tax cuts from a different perspective. They highlight that higher income taxpayers pay a greater share of federal taxes, and the tax cut was fair in so far as it benefitted the taxpayers with the highest tax burdens. According to CBO, the top 20% of households in the income distribution pay more than two-thirds (68.9%) of all federal tax liabilities, while the top 1% of households pays more than a quarter of all Federal taxes (28.1%).  CRS report - URL - www.fas.org/sgp/crs/misc/R42485.pdf 

The Obama Administration has proposed to allow the Bush tax cuts expire for high income taxpayers (single taxpayers with income over $200,000 and married taxpayers with income over $250,000 - the richest 2% of taxpayers) and permanently extend the tax cuts for other taxpayers (the middle income tax cuts).  This proposal is estimated to increase tax revenues by $252 billion over five years and by $678 billion over 10 years, but still leaves federal debt on an unsustainable path.  Allowing the tax cuts targeted to high income taxpayers to expire as scheduled could help reduce budget deficits in the short-term without stifling the economic recovery.  CRS, Summary

The Tax Policy Center (TPC)

• What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP. Such dramatic tax increases are politically untenable and still wouldn't come close to eliminating the deficit.  TPC Report

Debt/Deficit

Total Public Debt Outstanding is currently $15.8 trillion (July 2012).  Treasury

CBO estimates the 2012 deficit to be $1.2 trillion.  CBO

Taxes Paid (most recent CBO data available)

• In 2009, the share of federal taxes owed was 0.3 percent for households in the lowest income quintile, 9.4 percent for households in the middle quintile, and 67.9 percent for those in the highest quintile.  CBO

• In 2009, households in the bottom fifth of the before-tax income distribution paid 1.0 percent of their before-tax income in federal taxes, households in the middle quintile paid 11.1 percent, and households in the highest quintile paid 23.2 percent.  Average rates were higher for higher-income groups within the top quintile, and households in the top 1 percent of the before-tax income distribution faced an average rate of 28.9 percent.  CBO, Page 3

• Between 1979 and 2007, the share of total federal tax liabilities have declined for all quintiles except the highest.  CBO

• In 2009, households in the highest quintile received 50.8 percent of before-tax income and paid 67.9 percent of federal taxes; households in the top 1 percent received 13.4 percent of income and paid 22.3 percent of taxes.  In all other quintiles, the share of federal taxes paid was smaller than the share of before-tax income: Households in the bottom quintile received 5.1 percent of income and paid 0.3 percent of taxes, and households in the middle quintile received 14.7 percent of income and paid 9.4 percent of taxes.  CBO, Page 6

Recently Added New Taxes

• The new health care law also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 will pay an additional 'Medicare contribution' of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds.  Center for Medicare and Medicaid Services, Page 24

• Beginning in 2013, an additional Medicare Hospital Insurance (HI) tax of 0.9 percent is assessed on earned income exceeding $200,000 for individuals and $250,000 for married couples filing jointly.   Soc Sec Admin

• Tax revenues could also be increased without raising marginal tax rates by, for example, reducing tax expenditures (that is, special exclusions, exemptions, or deductions from gross income; preferential tax rates; or deferrals of tax liabilities).   CBO, Page 33

The only thing not mentioned here is the idea that raising taxes in order to lower our deficit/debt would require that the new revenue actually be used for those purposes.  Some people may believe that will happen, others may not.  But as usual, let us know what you think on this subject.

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