Congress is Talking Taxes

Tax cuts passed more than a decade ago are scheduled to expire on December 31, 2012. When Congress reconvenes after the November election, what to do with these tax cuts will be at the top of their agenda.

This brief guide to the “Bush tax cuts”—so-called because President George W. Bush proposed them in 2001 and 2003—discusses the options Congress has and the implications of its choices.

What did the “Bush tax cuts” do?

The tax cuts made three kinds of changes to the tax code.

• Lowered tax rates: Most tax rates went down by 3 percent, while the top rate went down by 4.6 percent. The 15 percent bracket stayed the same and a new 10 percent bottom bracket was created. The laws also lowered capital gains and dividend tax rates, which are taxes on investment income.
• Changed exemptions and deductions: Before the tax cuts, higher income taxpayers were not able to claim the full value of their personal exemption or itemized deductions. The tax cuts eliminated the phase-out of the personal exemption and some limitations on itemized deductions. It also removed the “marriage penalty” from the standard deduction, the 15 percent tax bracket, and the Earned Income Tax Credit. (The marriage penalty occurs when two people pay higher taxes when they marry than if they remain single.)
• Expanded tax credits: The laws expanded the Child Tax Credit and the Dependent Care Tax Credit. (The credits were expanded further in 2009 as part of the Recovery Act.)

How did these tax changes affect U.S. households?

Some of these changes decreased the tax bills of lower-income families. But the biggest benefit accrued to the wealthiest people and families in the United States. See the chart at right.

What options is Congress considering?

If Congress takes no action, all of the tax cuts will expire on December 31.

Elected officials have made many proposals, most of which would extend some or all of the tax cuts for at least a short period of time. Earlier this year, the House passed a one-year extension of all the cuts. President Obama has proposed a one-year extension of all tax cuts on income up to $250,000 ($200,000 for a single taxpayer). Many members of Congress have proposed other partial extensions of the tax cuts.

All of these extensions would benefit wealthy households more than middle- and lower-income households. Even if wealthy households lost the special tax breaks on their income above $250,000 (or $200,000), all of their income below that amount would still be taxed at the lower rates. On average, the highest income household would still receive more than $12,000 in tax cuts per year—more than any other income bracket, according to the Tax Policy Center.

Continuing the cuts is also expensive. It would cost about $3.7 trillion to renew all of the cuts for 10 years. Continuing tax cuts only on incomes below $250,000 (or $200,000) would still cost about $2.7 trillion.

What should Congress do?

Leading economists agree to a startling degree. Martin Feldstein, former chair of President Reagan‘s Council of Economic Advisors; Peter Orszag, former director of the Office of Management and Budget under President Obama; and the economists at the Center on Budget and Policy Priorities recommend letting all of the tax cuts expire and then reinstating some credits that are tailored to the nation’s needs.

FCNL’s policy on taxes—that the government should collect sufficient revenue to meet its actual needs, and that it should do so progressively (according to the ability to pay)—leads us to agree with this position. However, we acknowledge that Congress is unlikely to let all the tax cuts expire due to the powerful political pressure members are under to renew at least some of them. At the very least, Congress should extend the tax cuts only on income up to $250,000 (or $200,000 for single taxpayers).

How can you participate in this debate?

With the tax cuts set to expire at midnight on December 31, Congress has just a short window to act. We expect votes on extending the tax cuts to come in late November or early December.

Please contact your members of Congress now and urge them not to extend tax cuts on income greater than $250,000. Urge them to seriously consider the consequences of extending all the tax cuts.

Tax revenues need to be a part of any discussion about cutting the federal deficit and debt. Our nation must find more revenue to meet our real needs, which arise from poverty, hunger, the hopelessness fostered by unemployment, a crumbling physical infrastructure, and climate change that is already affecting our livelihoods.

The tax system should also be fair. While some have struggled through this last decade, the wealthiest 2 percent have become much wealthier in the last 10 years, in part because of these tax policies. That 2 percent now controls one third of this country‘s wealth and can afford to contribute more fully to the common good.

Now is the time to make your voice heard.