Yet Another Alternative to Bush Tax Cuts Expiration

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Yesterday, I went over the three alternatives to how Congress might deal with the expiring Bush tax cuts. As it turns out, retiring Senator Chris Dodd, who is the chair of the Senate Banking Committee, has suggested that the tax cuts be extended for everyone earning less than $500,000, rather than President Obama’s bar of $250,000. Senator Blanche Lincoln of Arkansas has said that we should extend tax cuts for everyone who makes under a million dollars a year.

While they are hardly “proposals,” these two alternatives, raising the bar to either $500,000 or $1 million, would reduce the amount of tax collected and the complaints of Republicans, who say taxing those earning over $250,000 hurts small businesses. The Tax Policy Center has estimated that the current Obama proposal, which would extend cuts for everyone who made less than $250,000, would only raise the taxes of 1.7% of households, or about 2.7 million. Raising the bar to $500,000 should cut that number in half and raising it to $1 million would lower it to around 500,000 households, estimates Roberton Williams, the senior fellow at the Tax Policy Center responsible for the original estimate.

Interestingly, the biggest tax bite comes from the increase in long term capital gains and dividend tax from 15% to 20%. It’s no secret that the wealthy often enjoy lowered tax rates because investment income is taxed at a much lower rate. If you’ve ever heard Warren Buffett complain about his secretary paying a higher tax rate than he does, it’s because of the difference in tax rates on investment income and regular income.

{ 15 comments, please add your thoughts now! }

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15 Responses to “Yet Another Alternative to Bush Tax Cuts Expiration”

  1. MD says:

    The wealthy don’t enjoy a lower tax rate. An interesting read as to why:

    • live green says:

      Great link. It really made me look at the capital gains issue in a different light.

    • Texas Wahoo says:

      Where that issue gets murky is with people who make most of their money in the form of capital gains, such as hedge fund managers. Of course, the better way to deal with that issue is to alter the law for those people, not for everyone.

      • billsnider says:

        That thinking is why we have a much complained about complicated tax system.

        Bill Snider

      • tom says:

        I think you mean a repeal of the current provisions that allow hedge fund managers to be taxed in that fashion.

        I disagree though. Most hedge fund managers are paid out using the 2/20 rule. They get the 2% management fee (taxed as income) and 20% of the fund’s return (taxed as capital gains). If the fund sees 0%, they get $0. It’s because of their own investment strategy that they are seeing high returns, so why shouldn’t they reap the benefits? Their clients are AND their clients have agreed to allow them to skim 20%. It is all capital gains anyway.

        • Texas Wahoo says:

          The problem is it is inconsistent with the way others are paid. If you work for a company and its value skyrockets because of your work, the company may decide you should get a cut of the skyrocketing value. However, that value, whether given to you as cash or stock, will be taxed at ordinary income rates.

          The capital gains are the investors, not the hedge fund managers (except for the little money of their own they contribute). The tax law just allows them to take out the money first, so they can pay a lower tax rate than other people for their performance bonus.

          • tom says:

            Ahh… you’ve changed my mind (and that’s difficult to do)!

            It’s like a commission. Sales commissions are taxed at normal rates and that is purely performance based.

            So I agree with you, repeal the provision that allows them to be taxed at capital gain rates on their 20% performance payments.

    • cubiclegeoff says:

      Interesting perspective, but I think getting into the past taxes on inherited money seems to be a bit misguided, since the taxes were on the relative, not the recipient.

  2. Mzzingu says:

    Tax cuts are irrelevant if AMT isn’t adjusted. The politicians can say they voted for tax cuts, but the tax rate will stay the same or worse if one is subject to AMT. A win-win for the politicians.

  3. Shckr7 says:

    Of course, I have to point out that the dividends have ALREADY BEEN TAXED!!!!

    The 15% capital gains tax is in addition to the taxes that the corporation has already paid on this income. So the real tax that a shareholder is levied with is the Capital Gains Tax + Corporations Income Tax. This, my friends, is a far departure from 15%.

    What’s this you say? That is different and does not affect the individual because the rich corporation paid the taxes? I would encourage you to review the Commutative Property of multiplication.

    The fact that a capital gains tax on dividends exists in the 1st place is amazing to me – and this is from someone who makes less than $1k a year in dividends……

  4. bngthr says:

    If the Bush Tax Cuts are extended they need to get tough and heavily TAX Hookers, since that is where most of the money went, that and other sinful diversions.

    • govenar says:

      I think you were joking, but that seems like a pretty good idea to me. Legalize prostitution and marijuana, and tax it; the government makes lots of money, people have more freedom.

  5. Donald says:

    If the current 10% bottom bracket is eliminated with the expiration of the Bush tax cuts, everyone will be paying at least $400 more next year in income taxes unless you make less than $8000 in taxable income. I wish the Republicans and Democrats would stop holding this gun to our heads.

  6. Wade Dokken says:

    The Bush Tax cut expiration is now juxtaposed against the deficit commission, however there seems to be little connection between the issues by the political class.

    Wade Dokken
    President, WealthVest

  7. leassure says:

    the bush tax cuts should be reenstated. the united states government should learn like the rest of us to not spend more than we make . cut out the perks and the pork.

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