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Battle Looming Over Bush Tax Cuts -- Will Your Tax Bill Go Up?

5 years ago
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To extend or not extend the Bush tax cuts? That question is at the heart of the debate between Democrats and Republicans on Capitol Hill, as lawmakers line up to let the tax cuts expire, make them permanent, or do a little mix and match.

Most Republicans, who have traditionally advocated for lower taxes, say that letting Bush's tax cuts expire amounts to a tax increase -- the last thing a country should do in the middle of a recession. Democrats counter that with the federal deficit at a record high, the country cannot afford to take more money out of the treasury, especially to finance lower taxes for the wealthiest Americans.

The most likely scenario is one President Barack Obama and most Democrats in Congress prefer -- keeping the current income tax rates for lower- and-middle-income earners, but raising the rate for the wealthiest Americans -- namely individuals making more than $200,000 a year and families making $250,000 or more. Many of the other cuts would remain under this scenario.

But Congress must act soon to prevent any of the Bush tax cuts from ending and there's no guarantee it will pass a bill before next year's expiration date. To help you understand what's at stake, we've put together a Bush Tax Cut Primer below.

But first, a little background.

In June 2001, Congress passed a large package of tax cuts that President George W. Bush pitched on the presidential campaign trail. Not only did the legislation reduce income taxes for nearly all Americans, it sent $300 or $600 rebate checks to every taxpayer. The legislation also phased out the estate tax, reduced the "marriage penalty" for couples filing jointly, increased the threshold for the Alternative Minimum Tax (AMT), and raised the child tax credit that parents could claim on their annual returns.

The most unusual aspect of the 2001 package was that the cuts were temporary, with some reductions phasing in as late as 2006, and all of them expiring by the end of 2010. Not only did the bill stipulate that some of the cuts would be good for only a year or two, it also left the task of ending or extending tax relief to whomever followed Bush in the White House.

Despite the $1.35 trillion price tag, which some Democrats complained was too expensive, Bush and Congress would go on to pass five more tax-cut packages over the next seven years, with the biggest breaks coming in 2003. In that bill, Congress trimmed taxes on capital gains and dividends; accelerated most of the 2001 cuts that were scheduled to be phased in; temporarily erased the "marriage penalty" for couples filing jointly; again increased the child tax credit; and made another AMT fix. That price tag in 2003: $330 billion.

Subsequent years saw more fixes to the AMT and extensions for the marriage penalty break, capital gains and dividend cuts, and other targeted measures, which were all originally short-term fixes. All together, the Bush tax cuts cost just north of $2 trillion.

Unless Congress acts this year, all of the tax cuts mentioned above will expire as the legislation originally called for. Here's what that would look like:

Income Taxes

-- Some taxpayers in the 10 percent bracket would go to the 15 percent bracket;
-- The 25 percent bracket would go to 28 percent;
-- The 28 percent bracket would become 31 percent;
-- The 33 percent bracket would go to 36 percent; and
-- People in the highest bracket -- 35 percent -- would see their rate go up to 39.6 percent.

Obama and most Democrats in Congress want to let the rate cuts for the two highest income brackets expire and go back to their previous, higher levels, but leave unchanged the income tax rates for other Americans.

Estate Tax

In 2001, estates worth more than $675,000 were taxed at the 55 percent rate. Over the years, the threshold rose to $3.5 million, and estates worth more than that were taxed at the 45 percent rate. This year, the estate tax rate is zero. But starting in 2011, it would return to 55 percent with a $1 million exemption. Most Democrats say they'd like to see estates taxed at the 2009 level of 45 percent, but there is not yet a consensus about the exemption amount. A smaller number of Democrats, led by Sen. Blanche Lincoln (D-Ark.), have advocated a $5 million exemption and a 35 percent rate.

Marriage Penalty

Before 2001, married couples that combined their income and filed a joint return were taxed at a higher rate than if they filed separately. They also did worse when it came to calculating deductions, tax bracket eligibility and credits. The tax cut packages during the Bush years eliminated most of those inequities, but they will return full force without congressional action.

Capital Gains and Dividends

The 2003 tax cuts reduced levies on capital gains and dividends to 15 percent or 5 percent based on a person's income. More cuts zeroed out dividend taxes entirely for some earners. Capital gains rates will return to 20 percent in 2011 without action, while the tax on dividends will go back to marginal rates.

Alternative Minimum Tax

It may come as a surprise that the United States has two parallel tax systems -- one for high earners and one for middle- and low-income Americans. The dual tax system was developed about 40 years ago to prevent wealthier Americans from zeroing out their taxable income with clever deductions and accounting tricks.

Currently, the AMT, which includes different and less generous tax breaks, applies to families making more than $70,000 and individuals making more than $46,000 annually, but in 2011 those numbers would revert to 2001 ranges. That means millions of Americans -- families making $45,000 or more and individuals making at least $33,750 -- would be hit with the higher tax.

Child Tax Credit

In 2010, most families got a $1,000 tax credit for each child. In 2011, the credit would drop to $500 per child.

In general, Democrats say they want to extend nine-tenths of these tax cuts. President Obama's budget blueprint extended the tax cuts for all but the top income brackets, and the Senate Budget Committee endorsed a similar proposal.

But Congress needs to move on a bill (as yet unwritten) and pass it before the end of the year to make those promises a reality. Is it possible? As Sen. Richard Durbin (D-Ill.) the Democrats' second-ranking senator, told Politics Daily this week, "We know the direction we want to go in, but we're not there yet."

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The budget windfall the Clintons enjoyed was a result of Reagenomics. Bush worked on the results of the Democratic downfalls that followed Clinton. The Democratic party controlled congress during that time - who is really to blame? EVERYONE! Why is it fair for 4% of the taxpayers to carry the country? If I am only bringing home 60 cents out of every dollar I make why should I continue to work hard, employ 60 others, and contend with all the headaches the government adds to my workplace? Shoot - we should all quit our jobs and let the government own everything and take care of all of us! When did we become such a "gimme" society? I agree we should pay taxes - however when did $250,000 a year with a family of four to support become the rich? We must find an equitable formula for taxes without putting the greatest burden on the smallest part of the population.

September 16 2010 at 8:21 PM Report abuse +1 rate up rate down Reply

A tax increase for those whoes taxes increase but not a decrease for those who paid the same last year. With a promissed tax increase they wonder where the jobs went The damage has already been done.

September 16 2010 at 8:04 PM Report abuse -1 rate up rate down Reply
Hello Richard

Our National goverment has been running a deficit for generations. With the one exception, most of the Clinton Administration was actually in surplus. And that surplus did go toward paying down the National debt. outside that one exception, we havn't been paying our bills! And most of our budget is "non discretionary" spending. Approximately 21% of budget are items other than defence, social security, mediacare and mediacade. And every year we don't have tax level match spending level billions of dollars in interest get added to the debt that WE all have to pay! The Bush tax reductions voted in in 2002 had an experation date of 2010. That's how it was written. The GOP predicted that those tax cuts would boost the economy and lead to millions of jobs and increased wealth for everyone. Does anyone reading this post want to claim that they were right? Their ideas failed.

August 02 2010 at 6:35 PM Report abuse +1 rate up rate down Reply

Let them all go up. It's time we all paid our fair share. We can't keep living in la-la land. In order to keep our government we have to pay for it. All of us! I will take the 3% increase, gladly!!!

August 01 2010 at 7:30 PM Report abuse -8 rate up rate down Reply
Hi Judy

Not if you make under $200,000 annually

August 01 2010 at 2:15 PM Report abuse -8 rate up rate down Reply

The easiest way to solve this problem is a sort of flat tax in the form of a sales tax. example 3 or 4% of everything you buy. That way all people will get taxed the same based on spending habits which would be inline with income.

July 31 2010 at 9:59 PM Report abuse +7 rate up rate down Reply
1 reply to Kenneth's comment

That's the easiest way to transfer even more wealth from working folks (who spend most of their income) to wealthy folks (who invest most of their income). That doesn't "solve" the problem from my perspective.

August 01 2010 at 3:00 AM Report abuse -4 rate up rate down Reply
Hello Richard

Yes our government needs to work towards a balanced budget. But the question is where to cut. different people will have different priorities. If you google "federal budget", and go down to the 4th choice with the bar graphs and pie charts you can see that only 21% of the total budget is what is called discretionary spending. Defence is 21%, Social Secruity is 21%, Medicare/Medicade 19%, safty net programs is 9%, interest on the debt is 9%, then "everything else" is 21%. Trying to get to a balanced budget by "just cutting" programs will not get us to a balanced budget. We know we had a balanced budget with a surplus going toward the debt under President Clinton. The economy has changed in the past 10 years, but we should be able to determine what was working back then, and develop current tax policies to get similar results. Allowing the Bush tax cuts for those with incomes over 250.000 (as Bush's own policy called for) shoud be the 1st step.

July 31 2010 at 6:10 PM Report abuse +9 rate up rate down Reply
2 replies to Hello Richard's comment
kit kittrell

I don't know why they have two brackets for single and married people ($200,000 and $250,000). Has anyone been tracking what it costs to be single right now. I know it costs a small fortune to date these days. I know I took a date to a party at the Playboy Mansion, and it cost a small fortune after plane tickets, hotel rooms, drinks, condoms, aspirin, pepto bismal, bail money, lawyers fees..etc. I don't think I need to be penalized so quick at $200,000. It should be the exact opposite....$250,000 for singles...and $200,000 for married people...they just stay home and fight anyway..and that's cheap...;)

September 16 2010 at 8:54 PM Report abuse +1 rate up rate down Reply

Very easy for you to pass the buck to the "minority," because it's not YOU who must carry the burden of taxes for this country. Until YOU are willing to allow YOUR tax rate to return to 2001 levels, YOU are part of the problem. Heck, the fairest way is a FLAT tax. Progressive is already unfair. YOU are not entitled to the benefit os someone else's hard work. Where's your pride? Geesh! (And no, my taxes wouldn't go up. I don't make that much money, but I don't think it's someone else's responsibility to carry the financial burden of this country ... unless of course I'm willing to give them all the power, which I'm not.) Pay your share people, and stop demanding that people take care of you. Maybe if YOU had to pay a fair tax, you'd do more to demand that your representatives be responsible stewards.

September 17 2010 at 9:35 AM Report abuse +1 rate up rate down Reply

The Chinese are very hard working people with average annual salaries of $3,100.00. Why are we complaining about anything? You want this lifestyle? Pay up! We allow other countries to take advantage of their own people so that we can be the top dog on the hill. God must be thrilled with our Conservative Christian attitudes.

July 31 2010 at 2:31 PM Report abuse -10 rate up rate down Reply

While Obama is definately not the brightest candle in the pack, he has to realize that this would just drive the economy deeper into the hole. My prediction, the Bush tax cuts will not expire.

July 31 2010 at 1:42 PM Report abuse +12 rate up rate down Reply
1 reply to bildaws's comment

President Obama realizes that giving more huge tax cuts to billionaires is not sound fiscal policy. Lowering the deficit and targeting tax cuts to middle income folks is much wiser.

July 31 2010 at 2:25 PM Report abuse -4 rate up rate down Reply

Flat exemptions, no deductions, all income and assets sheltering through loopholes or in foreign holdings. The only way to go, if you are looking toward being fair.

July 31 2010 at 1:19 PM Report abuse +12 rate up rate down Reply

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