Under President Obama’s Plan For The Bush Tax Cuts, Everyone Still Gets A Tax Cut

Our guest blogger is Michael Linden, Associate Director for Tax and Budget Policy at the Center for American Progress Action Fund.

Here’s something I bet you didn’t know. If we let the Bush tax cuts for the wealthiest two percent of Americans expire at the end of this year as scheduled, everyone still gets a tax cut. Yes, everyone.

Right now, the entire panoply of massive Bush tax cuts is set to disappear 141 days from now. Though those cuts were skewed heavily to the very wealthy, they did lower tax rates for everyone. Which means that if the all the cuts expire as scheduled, everyone’s taxes will go up. President Obama and Congressional Democrats don’t want that to happen. They have pushed to keep the tax cuts in place for everyone making less than $250,000, but to let them expire for the wealthiest two percent of Americans.

Anyone who was paying attention during the 2008 presidential election knows that Obama has been extremely consistent on this particular point. Congressional Republicans, however, don’t seem all that willing to allow the tax cuts for the middle class to stick around unless the wealthy get to keep theirs too.

The Republicans are simply wrong on the merits, but it’s important to note that rich people will still pay lower taxes under the President’s plan than they would if all the tax cuts expired. In other words, even with the expiration of the high-end Bush tax rates, the richest two percent still get to keep some of their tax breaks.

An excellent chart in the Washington Post yesterday, based on a recent analysis from the non-partisan Joint Committee on Taxation, illustrates this pretty clearly. As you can see, under the Democratic plan, millionaires will still get a tax cut of more than $6,300. That’s about six times as much as the median household.

How can this be? How is it that letting the Bush tax cuts expire on the richest two percent nevertheless results in a tax cut for those very same people? The answer can be found in our progressive income tax system.

The top income tax rate — currently 35 percent — that everyone talks about is a marginal rate, which means that someone in the top tax bracket only pays 35 percent on the top part of their income. In 2009, for example, that rate applied only to each dollar after the first $372,950 of taxable income (for married couples). For dollars earned up to that limit, rich people pay the same rates as people who make far less.

To understand why this system means that rich people will still get a tax cut, let’s look at a hypothetical example. Imagine a wealthy couple – let’s call them the McDucks – who will bring home half a million dollars in taxable income next year. Under the Democrats’ plan, the tax rates for all income below about $250,000 would stay the same. That would mean the McDucks will pay 10 percent on the first $17,000, 15 percent on the next $40,000, 25 percent on the next $80,000 and 28 percent on the next $100,000. Only after that would they start paying more than they did this year. Their total income tax bill under this plan, would be just over $154,000 — $6,000 lower than it would be if all the tax cuts expire.

Let’s be clear: if the GOP gets its way, the tax cuts for rich people will be much bigger than this. The McDucks, for example, would get another $10,000. But that’s precisely the point. This fight regarding the Bush tax cuts is entirely over whether or not we want to borrow $31 billion next year just so millionaires can get a bigger tax cut than the one the Democrats are already proposing.