Is The Discussion About The Bush Tax Cuts Just A Diversion?

The argument over the Bush tax cuts has come down to whether or not the top 3% of wage earners should continue to have their taxable income over $250,000 taxed at 35% or should it go to 39%.

This statement is really an oversimplification.  Actually the two top tax bracket will be increased under the Democrats plan.  Here are the tax brackets from 1992 through 2007.

The brackets for 2008 - 2010 are the same as 2007.  The Democrat plan is to roll back the two highest brackets to the 1993-2000 level while keeping the bottom four brackets at their current levels.

The next table shows the taxable income levels that these tax bracket are applied.

These levels are for 2009.  Both of these tables are from here.  Check here if you want to see the 2010 income levels.  They are very similar.

So, essentially it looks like we are talking about having the highest 3% of income earners, not necessarily the top 3% wealthiest people, paying about 10% more in federal income tax on taxable income over $250,000.  There is total agreement on federal taxes below $250,000 taxable income
 
But for many people, the additional amount will be substantially less than 10%.  Let's use the 2009 taxable income level for this example.  Let's say you have a $250,000  taxable income. (Remember, this is taxable income.  You may have earned $400,000 but have $150,000 in deductions and exemptions.)  Your first $208,850 will be taxed at the new lower level under the Democratic plan, so the increase from 33% to 36% will only apply to income above $208,850.  In other words, the 3% increase in apply to only $41,150.  Your tax increase will be $1235 or about 0.5% of your taxable, not total, income.

Not exactly a budget buster!

Why is so much effort being put into this effort to extend the Bush tax cut for everyone?    We are not talking huge sums of money here.  They are amounts that can easily be paid. 

That's not the whole story.  There is something that people are not talking about.  Capital Gains and Dividends.  The majority of people, the poor and middle class, don't get much of their annual income from capital gains and dividends.  They don't have much invested in the stock market.

Right now, capital gains and dividends are taxed at 15%.  That is the primary reason the top 400 wage earners in the US pay only about 15% - 20% federal income tax while the rate on earned income is over 30%.  The top 10 hedge fund managers earned an average of 2 Billion dollars last year.  They paid 15%.

Well, if the Bush tax cuts are not extended, capital gains will increase to 20% and dividends will increase to 39.6%.  Obama has proposed increasing dividend to 20% rather than 39.6%.  Republicans want them both to stay at 15%.  So, the republican are not only trying to keep the wealthy from paying more on earned income, they are trying to keep the wealthy from paying more on capital gains and dividends.

There is one other thing that we never hear about.  It is call PAYGO.  PAYGO was reinstated earlier this year.  It compels new spending or tax changes not to add to the federal deficit.  Parts of the Bush tax cuts are exempt from PAYGO.  In other words, they can be extended without having to be paid for.

Guess what parts are required to be paid for?

• Tax cuts on the top two brackets (not allowing them to go up to 36% and 39.6%)
• A dividend tax rate less than 39.6%

 Republicans are saying that tax cuts for the wealthy don't have to be paid for.  Sorry.  Wrong.  PAYGO says them must be paid for.  We already know that the tax cut for the wealthy will cost about $700,000,000,000 over 10 years.  Setting the dividend rate at 20% rather than 39.6 will cost about another $100,000,000,000. 

So, is the republican plan not only to give the wealthy a $800,000,000,000 gift in payment for a few million dollars in contributions, but also force the Democrats into making severe federal budget cuts which will hurt working Americans and further stall the economic recovery?

Remember, they are looking ahead to 2012 with only one goal in mind -- takeover of the White House.  They are willing to sacrifice you and me in the process.  They will do anything to piss off the average American as long as they can blame it on the Democrats.

It could get interesting. 


Reference dividend  paygo taxcuts