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Yet Another Alternative to Bush Tax Cuts Expiration

Yesterday, I went over the three alternatives to how Congress might deal with the expiring Bush tax cuts [3]. As it turns out, retiring Senator Chris Dodd, who is the chair of the Senate Banking Committee, has suggested [4] 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.