We’ve been hearing quite a lot in the media recently about the fate of the “Bush tax cuts”, and who wants to do what with them. But in typical media fashion, we generally haven’t been hearing what the Bush tax cuts actually contain. At Main Street Insider, we aim to provide that basic information, so in Episode 8, we examine the key provisions of the 2001 and 2003 laws set to expire at the end of December.
As always, see the links below for further detail, including cost estimates for each provision.
One-page summary below the fold…
Issue Overview: The Expiring 2001 and 2003 Tax Cuts 2001 Tax Cuts:
Pub. L. No. 107-16 (Economic Growth and Tax Relief Reconciliation Act of 2001)
2003 Tax Cuts: Pub. L. No. 108-27 (Jobs and Growth Tax Relief Reconciliation Act of 2003)
Click here to download this summary (pdf)
Status: All tax cuts outlined below are scheduled to expire on 12/31/10. Congress will likely extend at least the middle-class measures in the lame duck session, but the fate of the much more controversial and politically charged upper-income provisions is unclear. Purpose: In both 2001 and 2003, Congressional Republicans followed through on campaign pledges to pass large-scale tax cuts, but they did so using the budget reconciliation process both times. The Congressional Budget Act of 1974 requires any deficit-increasing measures passed under reconciliation to be phased out after ten years, so most of the major 2001 provisions expire at the end of 2010. A 2005 law (Pub. L. No. 109-222) scheduled major provisions of the 2003 tax cuts to expire at the end of 2010 as well. Summary: These provisions are generally categorized into “middle-class” and “upper-income” tax cuts, the latter falling mostly on those earning $250,000 or more. The Department of Treasury estimates the upper-income provisions to cost $679.6 billion over the next decade, while the cost of extending the other provisions would be roughly $3 trillion. It is worth noting that high earners would still benefit from the “middle-class” provisions, though not disproportionally so. The major expiring provisions are:
• Individual Income Tax Rates (2001) – top two rates “upper-income”, others “middle-class”
◦ Lowered the rates from 39.6% to 35%; 36% to 33%; 31% to 28%; and 28% to 25%. Created a new 10% bracket out of part of the previously lowest 15% rate. Expiration would restore pre-2001 levels across the board.
• Taxes on Capital Gains and Dividends (2003) – upper-income
◦ Gradually eliminated taxes (originally 10%) on long-term capital gains for income qualifying in the 15% bracket or lower, and immediately reduced the rate for higher income tax levels from 20% to 15%. Changed tax treatment of qualified dividend income from ordinary income to capital gains income. Expiration would restore pre-2003 levels.
• Estate Tax (2001) – extreme upper-income
◦ Gradually phased out the estate tax, originally $1 million exemption and 55% top rate, ultimately eliminating it for 2010 only. Expiration would restore the original rates, but the more likely scenario is a return to 2009 levels. ◦ Even at reduced 2009 rates of $3.5 million exemption ($7 million for couples) and a 45% top rate, only roughly 1 out of 400 inheritors would owe any estate tax.
• Alternative Minimum Tax – mostly affects those earning between $75,000 and $250,000 – considered upper-middle class
◦ The AMT, created in 1969 as a stopgap to prevent upper-income households from excessively exploiting loopholes, was not explicitly included in either the 2001 or 2003 bills. However, it been indirectly affected by the lower tax rates in these bills, leading to necessary “patches” from 2005 on to adjust for bracket creep. ◦ Most analysts expect the AMT to continue to be “patched” by keeping it at 2009 levels and indexing it to inflation.
• Other Provisions (all from 2001, some modified in 2003)
◦ Family measures: Expanded the Earned Income Tax Credit, the Child Tax Credit, the Child and Dependent Care Credit and the Adoption Credit – targeted to families across the income distribution, most helpful at the lower end ◦ Eliminated the “Marriage Penalty” by increasing the standard deductions and widths of the 10 and 15 percent brackets for joint filers from 1.67 times to twice the rate for single filers – not income-specific ◦ Expanded the Student Loan Interest Deduction to eliminate time restrictions – not income-specific ◦ Repealed the Personal Exemption Phaseout (PEP) and limitation on itemized deductions (Pease) – upper-income
Supporters: Most Democrats, including President Obama, support extending the middle-class tax cuts and letting the others expire.
• Supporters of this plan believe we cannot afford to give further tax breaks to the rich, which will cost roughly $700 billion over the next decade and result in little economic growth, given our debt situation.
Opponents: Almost all Republicans advocate extending all of the Bush tax cuts for two years; many want to make them permanent.
• Those wishing to extend all cuts claim letting them expire would hurt the economy and cripple a fledgling recovery.
Further links White House video laying out incidence of tax cuts: http://www.whitehouse.gov/blog/2010/09/29/white-house-white-board-cea-chair-austan-goolsbee-explains-tax-cut-fight Impact of extending each provision (Treasury Dept. via TPC): http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2785 Urban-Brookings Tax Policy Center video: Extending the Bush Tax Cuts: http://www.urban.org/url.cfm?ID=500185 CBPP Policy Basics: The 2001 and 2003 Tax Cuts: http://www.cbpp.org/cms/index.cfm?fa=view&id=2705 WaPo article on Boehner position: http://www.washingtonpost.com/wp-dyn/content/article/2010/09/15/AR2010091503052.html