Tuesday, December 7, 2010

Saturday, December 4, 2010

The Bush-Era Tax Cuts and the Nation's Economic Health (Post #27)

UPDATE: Obama has signaled a compromise has been reached with Republicans that would extend the tax cuts for all income levels but also extend unemployment benefits and provide for a temporary payroll cut on social security taxes for the middle class.

Below is a list of the main provisions of the Bush-era tax cuts from 2001 and 2003 that are set to expire on December 31, 2010:
  • The two "marriage penalty elimination" provisions will expire, so that:
    • The standard deduction for married couples will fall, no longer double what it is for single filers; and
    • The ceiling of the 15% bracket for married couples will fall, no longer double what it is for single filers
  • The 10% tax bracket will expire, reverting to 15%
  • The child tax credit will fall from $1,000 to $500
  • The tax rate on long-term capital gains earned by middle- and upper-income people would rise from 15% to 20%
  • The tax rate on qualified dividends earned by middle- and upper-income people would rise from 15% to ordinary wage tax rates
  • The 25% tax rate would rise to 28%
  • The 28% rate would rise to 31%
  • The 33% rate would rise to 36%
  • The 35% rate would rise to 39.6%
  • The PEP and Pease provisions would be restored, rescinding from high-income people the value of some exemptions and deductions
  • The estate tax would be restored with an exemption level of $1 million and rates that top out at 55%
Here is a visual of the savings for each income bracket under the Bush tax cut and the alternative plan of the Democrats. Allowing all Bush-era tax cuts to expire will save the US government about $700 billion. It is clear that the Republican plan will save the most money for the wealthiest classes. But will those tax cuts to the wealthiest allow money to trickle-down to the rest of society?

Earlier this week the U.S. House of Representatives voted to extend the so-called Bush Era tax cuts for families making $250,000 or less. The House allowed the tax cuts to expire on those making $250,000 or more.

On Saturday, the Senate, led by Republicans, voted to not to extend the Bush-era tax cuts for those making $250,000 or less. The Republicans are playing a game of chicken. By voting no on extending the tax savings to the middle class, they are trying to push Democrats to extend the Bush-era tax cuts to all groups, including those making millions of dollars a year.

Our politicians are struggling with two polarizing concepts. One, the US economy needs a boost and extending tax cuts will increase aggregate demand and hopefully spur spending and hiring. But which groups in society should benefit from a tax cut? On the other hand, we are facing a $13 trillion debt and ending the Bush tax cuts will provide the US government with over $700 billion, helping to reduce the deficit.

Here are more detailed arguments in favor of extending or ending the tax cuts:

Arguments for allowing the tax cuts to the rich to expire.

Arguments for extending the tax cuts to the rich.

Your task:
Should the Bush-era tax cuts be extended to all groups including millionaires or only on the middle class? Or should all the Bush-era tax cuts expire?

Other questions to consider: what is a fair tax? Who should shoulder the burden of taxes in society? What is more important, balancing the budget or stimulating the economy?

Be sure to post by Wednesday, December 8 at 8:00am.