President Barack Obama’s plan to let Bush-era tax cuts for the highest-income Americans expire would have limited effect on 76 percent of those taxpayers, a study says.
Under the Democrats’ plan to end a tax break for those earning more than $200,000 per individual or $250,000 per couple, the 3.8 million filers who fall in the $200,000 to $500,000 income range would pay $2 billion more in 2011 taxes, or an average of $532, according to a July 30 letter from the nonpartisan congressional Joint Committee on Taxation.
The study conducted for the House Ways and Means Committee shows that those earning between $200,000 and $500,000 would account for 5 percent of the planned $38 billion tax increase. The biggest burden would fall on the 608,000 taxpayers who make between $500,000 and $1 million and the 315,000 who earn more than $1 million; the first group would pay $6.5 billion more, or an average of almost $10,000, and the second group would owe $31 billion more, or almost $100,000 on average, the analysis said.
For those who earn less than $500,000, the tax increase is “relatively low,” said Roberton Williams, an economist with the Urban Institute in Washington who studied the report. “It’s less than 1 percent.”
One reason for the muted effect on those taxpayers, he said, is that high-income Americans also reap built-in savings by retaining reduced rates that apply to lower-income categories. The top tax bracket doesn’t currently begin applying until taxable income after deductions exceed $372,950.
Democrats and Republicans are digging in for a September battle over the tax cuts that President George W. Bush pushed through Congress in 2001 and 2003 that will expire at the end of this year unless lawmakers take action. Obama and congressional Democrats say they will extend Bush-era tax cuts for individuals earning less than $200,000 and couples making less than $250,000. They would reinstate higher rates on income and investments that exceed those amounts starting Jan. 1.
Republicans such as Senator Jon Kyl of Arizona and House Minority Leader John Boehner of Ohio say restoring higher tax rates on high-income households would penalize investors and hurt job creation in a struggling U.S. economy.
White House spokesman Robert Gibbs said today that the debate could extend into the campaign for the November congressional elections. The tax cuts “will be a big part of the 2010 election,” Gibbs said.
3 Percent of Returns
The Joint Committee on Taxation estimated about 161 million tax returns will be filed in 2011. About 3 percent of those returns will be from individuals or couples earning more than $200,000, the committee said.
Unless Congress acts, tax rates of 10, 15, 25, 28, 33 and 35 percent will expire on Dec. 31 and be replaced with rates of 15, 28, 31, 36, and 39.6 percent. A $1,000 child tax credit will be cut in half as would other family-related benefits and many married couples will pay more. Rates for capital gains will increase to 20 percent from 15 percent. Dividends, currently taxed at 15 percent, would be taxed as ordinary income with rates as high as 39.6 percent. In addition, a top 55 percent tax on estates worth more than $1 million will be reinstated.
Higher Taxes for All
If Congress fails to act, taxpayers in all income categories would face higher bills, the study shows. The 156 million taxpayers earning less than $200,000 would pay $157 billion more. Among high-income taxpayers, those who earn between $200,000 and $500,000 would pay $27 billion more in 2011. Those who earn between $50,000 and $1 million would pay about $10.6 billion more, and those earning more than $1 million would pay $32.7 billion more.
Obama and the Democrats would retain the lower income-tax rate structures and family subsidies as well as reduced levies on investment income for those earning less than $250,000. They also want to extend restraints on the alternative minimum tax, a parallel system that if left unchecked would nullify the benefits of the tax cuts for more than 30 million families.
In a break with many congressional Democrats, Obama also favors capping the dividend and capital-gains tax rates at 20 percent for high-income taxpayers.
Republicans generally insist the tax cuts be extended in their totality and say anything less amounts to a tax increase.
“You will find Republicans resisting very strongly any bill that allows taxes to be raised on any segment of Americans today,” Kyl said in an interview last month. “It’s just not a good idea.”