Why We Shouldn’t Raise the Bush Tax Cut Threshold

December 6, 2012 at 4:44 pm

With policymakers divided over letting President Bush’s tax cuts on incomes above $250,000 per couple ($200,000 for single filers) expire on schedule, some have proposed raising that threshold so that only the tax cuts on incomes over $500,000 or $1 million per couple would expire.  That’s a terrible idea.  Raising the threshold would slash the deficit savings, and, contrary to what you might think, taxpayers above the new threshold would reap most of the benefit.

If we give the country’s highest-income households billions of dollars in added tax cuts, we’ll have to find billions in savings to offset the cost, on top of the cuts imposed as part of a deficit-reduction plan.  That would make key programs ranging from Medicare to education, basic research, food safety, defense, and homeland security more vulnerable to deep cuts.

Raising the threshold to $1 million would cost $366 billion over ten years; raising the threshold to $500,000 would cost about $156 billion.  As we’ve blogged, the Joint Committee on Taxation, Congress’ official scorekeeper for tax policy, found that letting the tax cuts above $250,000 expire would raise $829 billion over the next decade.  We’d raise 44 percent ($366 billion) less if we moved the threshold to $1 million (see first chart).

Similarly, the Tax Policy Center recently found that raising the threshold to $1 million loses nearly 40 percent of the revenue savings in 2013 from letting the high-end tax cuts expire.  Even raising the threshold to $500,000 would lose about 20 percent of the savings in 2013.  That translates to about $156 billion in lost savings over the next decade.

The added tax cuts from raising the threshold would go overwhelmingly to households above the higher threshold, because only they would get tax cuts on the full amount of the increase. If we raised the threshold from $250,000 to $500,000, for example, households over $500,000 would continue to get the Bush tax cuts on all of their income between $250,000 and $500,000. As a result:

  • Households with cash incomes above $500,000 would get 85 percent of the additional tax cut (that is, the tax cut on top of what households would get on their first $250,000 of income).  Millionaires would get 39 percent of it.
  • The average additional tax cut in 2013 would be about $8,570 for households above $500,000 and about $10,610 for millionaires.

If we raised the threshold from $250,000 to $1 million:

  • Households with cash incomes above $1 million would get 59 percent of the additional tax cut (see second chart).
  • Millionaires would receive an average additional tax cut of about $31,610 in 2013.

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More About Chye-Ching Huang

Chye-Ching Huang

Chye-Ching Huang is a tax policy analyst with the Center’s Federal Fiscal Policy Team, where she focuses on the fiscal and economic effects of federal tax policy. You can follow her on Twitter @dashching.

Full bio | Blog Archive | Research archive at CBPP.org

2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.”

    There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs, or tax increases. These are phony crisis issues!. Taxation manages inflation, among other variables, but not the amount of revenue needed to spend.

    In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector. When it creates money, over and above what it taxes or borrows, it adds it to the private sector. Since this is the case, it’s clear that present proposals to reduce the deficit by an average of $400-$800 Billion over the next ten years are sure to remove net financial assets from the private sector.

  2. 2

    Can you prove, through Federal Reserve Accounting principles and methodologies that tax receipts per se pay for Federal Government expenditures?

    Thank you for your response.

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