How Much Would Raising the Bush Tax Cut Threshold Cost?

As we reported last week, the Joint Committee on Taxation (JCT) calculates that letting President Bush’s income tax cuts expire for families making over $1 million would save only 56 percent as much revenue as President Obama’s proposal to let the tax cuts expire for families making over $250,000.

It has also been noted, though, that 81 percent of the benefits of the Bush tax cuts for families making over $250,000 goes to millionaires.  If 81 percent of these high-income tax cuts goes to millionaires, why does setting the threshold at $1 million raise only 56 percent as much as setting it at $250,000?

The difference between the 81 percent and 56 percent figures represents the tax cuts that millionaires now receive on their income between $250,000 and $1 million.  Under the Obama proposal, they wouldn’t get to keep these tax cuts because the tax cuts would no longer be applied to income above $250,000.  But they would get to keep those tax cuts if the Obama proposal is changed so that the threshold is $1 million.

That’s why raising the threshold to $1 million would be so costly — losing $366 billion over 2013-2022, JCT estimates.

Consider a married couple earning exactly $1 million in salary (and taking the standard deduction).  If policymakers extend the Bush marginal tax rates for families up to $1 million, that couple would get roughly $31,000 more in tax cuts than if policymakers extend the Bush rates “only” for families up to $250,000.  This is because they would face the Bush marginal income tax rates (33 and 35 percent) instead of President Obama’s proposed rates of 36 and 39.6 percent on part of their taxable income.

Taxpayers with incomes between $250,000 and $1 million would gain much less from raising the threshold to $1 million.  A couple earning $300,000 and taking the standard deduction, for example, would get about $1,200 more in tax cuts than under the $250,000 threshold because part of their income would be taxed at 33 percent instead of 36 percent.  (Their income isn’t high enough to benefit from the cut to the top tax rate.)  That $1,200 is only about 4 percent the size (in dollar terms) of the increase in the millionaire couple’s tax cut.

Citizens for Tax Justice estimates that fully 50 percent of the tax cuts in 2013 from moving the threshold from $250,000 to $1 million would go to taxpayers with incomes above $1 million.