Deconstructing the Current Tax Cut Squabble

By Roger Linnett

The Bush-era tax cuts are about to expire, as they were designed to, at the end of 2010. President Obama has proposed extending the current tax rates only for individuals making $200,000 or less, or families making $250,000 or less. The main effect will be to reinstate the maximum marginal pre-Bush tax rates on incomes over that amount, i.e., from the current 35 percent back up to 39.6 percent. Additionally, the capital gains tax rate would rise back to 20 percent from its current 15 percent.

Republicans in both the House and Senate are stridently demanding that the entire tax package should be extended, or they will hold their collective breath until they turn blue. And they’ve pledged they would rather let the tax cuts end for everyone than see the upper 2 percent subjected to the cruelty of Obama’s blatant discrimination.

Sadly, a large number of Democrats facing tough election races in the House, including several freshmen and many of the so-called Blue Dogs, sent a letter to the president at the end of September requesting he reconsider maintaining the capital gains rate at its current level, claiming their reelection chances would be crippled should they stand with him and the party leadership on his proposal.

There are enough of these recalcitrant Congressmen that it is unlikely the measure would pass a House vote as it stands. Should the entire tax cut package be renewed, and with the possibility of the Republicans retaking control of the House, it would most likely be extended for another decade.

Recent Congressional Budget Office and the Joint Committee on Tax projections show continuing the Bush tax cuts for the wealthiest 2 percent of taxpayers will directly reduce revenues by about $690 billion over the next 10 years.

However, the actual cost of those tax cuts is a bit more than $690 billion. We would also incur increased interest payments on the added debt of almost $140 billion. Therefore, the true cost of maintaining the tax cuts for the uber-rich increases to almost $830 billion.

But here’s the real mind blower – if a 4.6 percent increase amounts to $690 billion, the gross income needed to yield that $690 billion can be computed as follows:

$690 billion divided by 4.6 = $150 billion, i.e.,

1 percent of the gross.

That 1 percent x 100 = a gross income of $15 TRILLION!!

Now, $15 trillion taxed at 35 percent yields a net income of $9.75 trillion. Whereas, $15 trillion taxed at 39.6 percent nets only $9.06 trillion. The difference being $690 billion.

So the crux of the Republican’s argument is that we should extend the tax cuts for the wealthiest 2 percent of Americans because they will only rake in $9.06 trillion instead of $9.75 trillion. Oh! How will they ever manage on such a paltry sum?

Moreover, let’s not forget that those that make over $250,000 would still recoup around $7,000 in lower taxes on that first quarter million. Chump change for the uber-rich, but I doubt they’ll refuse it.

With all their caterwauling about the deficit these past two years it will be interesting to see what the Republicans do after the elections. Of course, that also depends on whether or not they do, in fact, seize control of the nation’s purse strings.





Categories: Politics, Roger Linnett