Today we sat down with Chuck Marr, Director of Federal Tax Policy at the Center, to discuss the debate about taxes that will take center stage when Congress returns after Labor Day.
Chuck, President Bush’s large tax cuts from 2001 and 2003 are due to expire at the end of this year. What tax cuts are we talking about?
The expiring tax cuts can be divided into two components: first, the so-called middle class tax cuts and, second, the tax cuts for those at the high-end of the income scale.
What are these middle class tax cuts?
The key middle class tax cuts are the expansion in the child tax credit, a reduction in some of the lower tax bracket rates, and marriage penalty relief which is designed to make sure that two people don’t face higher taxes if they get married – and file jointly.
Who benefits from these middle class tax cuts?
This point is essential in understanding how the cuts work. The provisions in the so-called middle class tax cuts are actually broadly based. This means that most taxpayers get some benefit from one or more of the provisions.
I think some people would be surprised to learn that, in dollar terms, high income people tend to actually get the most benefit out of these so-called middle class tax cuts.
This is because the income tax is more like a stair case than an elevator. High income people do not go directly to the top floor and pay the top tax rate on all of their income. Instead, they walk up the tax bracket stairs and pay different rates for different portions of their income. For example, this means that if one of the middle class tax bracket rates is cut all of the people that have incomes above that rate – higher up the staircase – also get a tax cut.
So, although high-income people benefit, should the middle class tax cuts be extended?
Yes, absolutely. These tax cuts do provide relief to middle class people. And middle class people tend to live paycheck to paycheck and consequently need to spend whatever money they earn. Given how weak the economy still is, it’s very important to keep the tax cuts flowing to middle class people so that they keep injecting the money back into the economy and thereby stimulating growth.
What about the high income tax cuts – what’s in that package?
These are tax cuts that exclusively benefit couples making more than $250,000 and singles making more than $200,000. The centerpiece of this package is the top two rates which are set to return to levels that prevailed during the prosperous 1990s. 80 percent of these tax cuts flow to people making more than a million dollars a year.
Would it be good policy to extend these high income tax cuts?
No, I don’t think the country can afford these tax cuts. Letting them expire on schedule – as they were intended to — would lower the national debt by one-trillion-dollars over the next decade.
Some people have argued that letting these tax cuts expire would hurt the economy in the short term. How do you respond to that?
These high income tax cuts are very different from the middle class tax cuts. Whereas middle class people live paycheck to paycheck, high income people don’t. They tend to save more of their money which means that their spending is less sensitive to these tax changes.
I completely agree though, that our most immediate concern is that nearly one in ten Americans is out of work and we need to do much more to get them back to work.
I would suggest that, in the short term, the Congress use the revenue from letting the high-end tax cuts expire to provide a generous tax incentive for small and big businesses to create jobs.