Who Benefits the Most from Extending Middle-Class Tax Cuts?

Last Updated Aug 13, 2010 6:06 PM EDT

Suppose that the tax cuts are allowed to expire for those making over $250,000, but not for households with incomes lower than that. How would the benefits from extending the tax cuts only for incomes of $250,000 or less be distributed? It turns out that the wealthy do pretty well. This is from the Center for Budget and Policy Priorities:
Extending "Middle-Class" Tax Cuts Would Help Wealthy Even More, CBPP: Who stands to gain the most if Congress extends the middle-class Bush tax cuts: a middle-income worker or a millionaire? The millionaire (see graph). That's one more reason -- on top of those listed here -- why Congress shouldn't add a trillion dollars in deficits and debt over the next decade by also extending the tax cuts exclusively for the richest 2 percent of families.


Why does this happen? The CBPP explains:
The income tax operates as a staircase, not an elevator, so people who make $1 million a year don't go directly to the top "floor" (i.e., to the top marginal tax rate, currently 35 percent) but instead take the "stairs," paying tax on the first increment of taxable income at the bottom rate of 10 percent, paying tax on the next increment at 15 percent, and so on until reaching the top rate.
As a result, the 2001 tax law's reductions in the lower tax brackets benefit not only middle-income people whose incomes fall into those lower brackets, but also people in the very highest brackets.
In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family... [T]he bottom line is that the wealthy are going to benefit from the Bush tax cuts even if Congress lets the large tax cuts aimed exclusively at them to expire.
Of course, as Ezra Klein notes with this graph, the wealthy do much better if the tax cuts are extended for all groups:

Klein
But the idea that higher income groups won't benefit at all from extending middle class tax cuts -- something that many people have been led to believe from the loud protests from special interest groups against allowing the tax cuts for the wealthy to expire, and something that I've heard enough to motivate this post to refute it -- is wrong. They just don't benefit as much. The wealthy will still receive the same benefits as everyone else in percentage terms for all income they earn up to the $250,000 threshold, it's only income in excess of this amount that will be subject to the tax increase that Bush scheduled to avoid having to pay for his tax cuts. Since these groups are the only ones whose incomes cross the $250,000 threshold, the percentage savings is largest for this group. It's not as big a benefit as they'd receive under the Bush proposal, true, but it's still pretty good relative to the savings accruing to lower income groups.

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