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Your Take: Bush Era Income Tax Cuts

Despite what you feel about President Obama, you have to appreciate the sheer amount of work he’s managed to get Congress to do in the few years he’s been in office. Whether or not they’re the right things to do will remain to be seen, but one topic that is sure to take center stage within the next few months, if not weeks, is what we should be doing about the soon-to-be expiring Bush-era tax cuts.

A little history for those of us who weren’t paying taxes before 2001 (that includes myself, at least on any meaningful level). President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 [3] and made one of the largest tax cuts we’ve seen in quite some time. Among other things, the EGTRRA (quite an acronym) lowered every tax bracket, lowered capital gains tax, and effectively lowered the tax burden on every single American. If you remember, this was the boom years of the Internet dot-coms and the economy was doing great. As a way to make the debt and deficit math look more palatable, the cuts were given a sunset provision of December 31st, 2010.

There is no question that the “rich” benefited the most from these tax cuts. Lowering the 36% bracket to 33% does far more than lowering the 28% to 25%, it’s just how the math of tax brackets [4] work.

December 31st, 2010 is not too far away and the debate is growing louder by the day as the November mid-term elections draw closer. Some Democrats and President Obama would like to continue the tax cuts for the lowest four brackets while letting the top two return to 2001 levels. Republicans would like to keep the cuts as they are.

I personally think that raising the top two and maintaining the bottom floor, as I tried to predict for 2011 tax brackets [5] makes the most sense. I think that if you earn $250,000 or more, you aren’t significantly impacted by increasing your taxes a few percentage points. Since I have an understanding of how taxes work for small businesses, I can assure you that this will not affect small business because that tax is on profits, not income (you deduct expenses from income to arrive at profit, or loss). All that talk about how this will kill small business is inaccurate.

The one thing that seems to be overlooked is the fact that keeping the cuts will cost us $3.8 trillion [6] over ten years, with $700 billion of that attributable to cuts for the top 2% of income earners. 18.4% of the cost will benefit 2% of earners… 2% that don’t need it. I’m not a class warfare type of guy but let’s take a page from Warren Buffet, one of the richest people in the world.

Update: Here’s a graphic comparing the two tax proposals [7].

I’m curious about what you think, should we let it all sunset? Partially? Keep it as is? Dump it for a flat tax? Let’s hear it!