There is currently a heated debate in Congress about extending the Bush tax cuts. The Bush tax cuts, which passed in 2001 and 2003, lowered the lowest marginal tax rate to 10% and capped the highest tax rate at 35%. These tax cuts are set to expire at the end of this year due to a sunset provision. Congress has been unable to reach an agreement on exactly who should continue to receive these tax breaks. Let’s take a look at the current debate and see how the President could help to resolve this situation.
Here are the current tax rates for single income tax filers.
[table id=5 /]
The big debate is over the last two columns in the chart. Income tax rates are set to increase on these last 2 groups to 36% and 39.6% respectively. The big fight is between Democrats and Republicans. Democrats would like to extend the tax cuts for income classes only below the $250,000 threshold. They are opposed to extending the tax cuts for those making over $250,000 a year because it would cost the country an additional $700 billion dollars. Republicans would like to extend the tax cuts for all for all income classes. They are against increasing taxes on those that make over $250,000 a year because it would raise taxes on the highest wage earners in a tough economic climate. Congress stands to waste a lot of time over the next 2 months debating this issue.
The Solution
The easiest solution for all parties involved is to reach a manageable compromise. The best solution in politics is often when both parties do not get exactly what they are looking for. A quarter of a million dollars is seen as too low a figure so the President should change the threshold. He should extend the tax cuts for every person that makes up to $999,999. The only people that would be subject to a tax increase would be those who make $1 million dollars or more in taxable income.
I doubt that there would be much of an uproar over a 4% tax increase on millionaires. It’s only the $1 millionth dollar of taxable income and everything above that amount that is taxed at the new tax rate. The first $999,999.99 of the dollars would still be taxed at the old rate. Remember that taxable income is not the same as income. It is adjusted gross income which is your income after you subtract deductions, exemptions and other adjustments. A person could easily earn a lot more than a million dollars and still not fall into the higher tax category due to tax deductions.
The million dollar taxable income figure is a good number because it will only affect those that are actually rich. Many professionals in business, healthcare, law, and other fields have incomes in the lower six figures and would be affected by the $250,000 income figure. It is clear that Congress must act by December 31st before taxes rise on the middle class as well.
What do you think should happen with the Bush tax cuts? What do you think Congress will do?
Photo by JD Hancock
I actually like your compromise. I still think the general public would have an issue with it. It is just like the Federal Estate Tax that affects next to no one – people still care. It is actually really interesting that seems to be particular to America. We care what happens to the rich because we one day hope to be that wealthy.
Good point Evan. I think so few people realize that only a small number will actually reach those ranks out of the entire population.