We hear about the political battle over the Bush-era tax cuts many times each day now, and that the sticking point is whether our highest earners should get a break, or be asked to shoulder some of the burden. It's a symbol of how ineffective our government has become, as partisan bickering comes before solving some large, long-term, genuine problems in the economy. But every one of us, millionaire or not, has a tangible stake in the resolution of the tax rate issue.
But for the moment let's forget Congress and the super-rich, and look just at estimates of what these tax rate changes could mean to you and me. Here are a few examples from a calculator thoughtfully provided by the Tax Policy Center of the Urban Institute and Brookings Institution. There are more pre-programmed examples, and you can plug in your own detailed income and deductions to estimate what the effects would be on your individual situation. The income definitions of low, middle, high, very high and top correspond respectively to the 20th, 50th, 80th, 99th, and 99.9th percentiles of incomes.
Pardon all the numbers in the table, but they're necessary to illustrate who's getting what.
Click to enlarge
Click to enlarge
If the tax cuts go away entirely, people at all levels will be affected, and those who earn the least will see the biggest increases in their tax bills, at least in percentage terms.
First let's consider extending the tax cuts versus letting them expire. For example, a couple with income of $75,000 and two children under 13 would pay about $2,600 more in tax. That's a 160 percent increase in the tax paid, and an increase in the overall tax rate from 2.2 percent to 5.7 percent. A Very High income couple, with $435,000 in income would pay about $20,000 more in taxes, and an overall tax rate of 20 percent, up from about 16 percent. But their taxes go up just 28 percent.
President Obama wants to offer ongoing tax relief to everyone except the top one percent of earners. How are they affected? To stay with a two-child couple, Middle income earners would pay less tax than with the current structure, High earners would pay the same, and Very High earners would see a 24 percent increase. Top earners with income over $2 million would pay 29 percent more federal tax, and see an increase in their rate from 19.7 percent to 25.5 percent.
This is an emotional topic, and I'm glad it did not come up around my Thanksgiving table. But we're at a crossroads here -- our government deficit must be reduced, and increasing taxes has to be part of that. Who should pay the bill? The many people with less money, or the few that have a lot? Deciding who shoulders that burden will be an important and difficult political battle.