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Reuters Article on Expiring Bush Tax Cuts Struck a Nerve

3 min readBy: William Ahern

As Gerald blogged yesterday, Reuters posted and then retracted a story on middle-class taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases. It suggested that all of the Bush tax cuts might expire at the end of the year, imposing a huge tax hike on low-, middle- and upper-middle income people.

The White House weighed in immediately because the Administration considers itself to be super-solicitous of the "middle class" (however defined). No one should be surprised that the Administration is apoplectic over a wire story that suggests it might let the entire package of Bush tax cuts expire, most of which benefitted people making less than $250,000, the threshold chosen by the Administration as the demarcation between those who deserved their Bush tax cuts and those who didn't.

The Administration's outrage is a bit overdone, though, for three reasons:

  • Democrats didn't support most of the middle-class tax cuts in 2001. The only Bush tax cut provisions that enjoyed any Democratic Party support in 2001 were the 10% rate and the doubling of the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. from $500 to $1,000. In running for president, Obama made the political calculation that the middle- and upper-middle income tax cuts (marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. relief, cutting the 28% rate to 25%, and cutting the 31% rate to 28%) were unassailable; hence the $250K threshold promise. (Throw AMT relief in that basket.) In his progressive heart, Obama can't really believe those cuts were virtuous. And now the Administration is desperate for big new sources of tax revenue, so there is suspicion that middle-class tax hikes are coming. As many commentators are pointing out, the new fiscal commission is exactly the vehicle that could deliver those tax hikes in a way that would look as if the President were being forced to do it, that he didn't break his tax promise willingly.
  • Bush's middle-class tax cuts were huge. Even now the President uses the phrase "mostly for the wealthy" in describing the Bush tax cuts as a package, which is false (at least by his own, new definition of wealthy — over $250K). Even the most anti-Bush tax think tank in town, Citizens for Tax Justice, can't come up with numbers that portray the tax cuts for people over $250K as reaching 50% of the whole package.
  • So many shocking things have happened that rational expectations are shaken. No one thought this Congress and Administration would allow the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. to reach full repeal, as it did on January 1, a month ago. But they did, violating every premise of progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. policy. And quite aside from politics, it's a nightmare for executors. Following that shocker was the health bill train wreck, resulting in a level of political and fiscal uncertainty that is almost unprecedented for a non-crisis situation.

So why couldn't the entire package of Bush tax cuts expire, as the Reuters article suggested? Many provisions in the new Budget are totally unrealistic — everyone knows they won't happen — yet the revenues are tallied right along with the realistic ones.

All that said, the expiration of the Bush tax cuts for people over $250K are realistic expectations, and the Reuters article should have noted that the President's new Budget is clear about which provisions it currently intends to allow to expire.