Let’s get it right on the tax plan

Last thought on the tax cut, deficit increasing “deal”.

Even the President’s preferred plan, keeping the cuts for all income under $250,000, would have meant that tax rates would have remained the same for all income under $250,000.  Everyone would have retained the Bush-era tax rates on the first $250,000 of their income.  Of course, anything above that would be taxed the higher rate.  If you make $275,000, the first $250,000 would be taxed at 33%, with the remaining $25,000 at 36%.  Or let’s say you make $400,000.  The first $373,650 would be taxed at 35% while the final $26, 350 would be taxed at 39.6%.  That’s not a lot to pay for the Americans who can most afford it, those who have benefited the most because of the opportunity that is America, especially during the Bush years.  They would have paid a slightly higher marginal rate on some of their taxable income while we began to repair the deficit (deficits don’t fix themselves or disappear if you close your eyes real hard). The fact is tax rates would have remained the same for everyone on their first $250,000.  Which means everyone. Unfortunately this was never what we heard.

How many people would have been affected under the President’s plan?  A little less than 1,000,000 people (out of 170,000,000 taxpayers).  Yes it would have been a tax increase on a portion of income for less than a million people.  That’s not insignificant, but my guess is they would have been fine.  And the deficit would be on its way to a better place.  Maybe it would have even started a reasonable discussion about solutions.

As the debate on the tax cuts continues (and it will) we need to be precise:  Under the Democrat’s proposal, everyone would have kept the Bush tax rates while a small group of Americans would have paid a higher rate on the portion of their income above a quarter million dollars.  Now the budget deficit will grow by nearly $900 billion, while we pretend we can come back to the discussion during a Presidential election year.  The Republicans know that they can stand in the way and win and the President is trying everything he can to shoo liberals away.  That’s the story and it’s awesome.

Oh, and conventional wisdom is that the Republicans would have extended unemployment benefits anyway.  They always have.  They’ll fight for a few days or weeks (see Jim Bunning’s filibuster last year) and relent.  They don’t want to be responsible for cutting off the only income for a lot of families.  They’re smart enough to know that the politics of that is bad for them.

2 Responses to “Let’s get it right on the tax plan”
  1. Theresa says:

    I think the Democrats should have made a bigger point about the first 250k for everyone staying at the same rate while the rate for above that goes up.

    I still don’t think people who make more money should have to pay a higher percentage than anyone else. I don’t believe their ability to afford it or not is the point. But it would have helped the Democrats to point out that the first 250k is the same rate.

    I’d much prefer a consumption tax. It would encourage working and saving while discouraging spending….but imagine what that would do to the economy!

    • Michael says:

      I get the impulse, no one wants higher taxes. Unfortunately, we can’t cut our way out of this hole. It’s going to require smart, targeted cuts and increases in taxes – there’s no way around it. We’re digging even deeper right now: Today we have a continuation of the Bush Tax Cuts, a lower payroll tax (generally a good thing), and a lower Estate Tax.

      About the consumption tax – it’s regressive and suffers when people consume less. There is no income tax in WA State,just a sales and property tax. In Seattle the sales tax is 10.5%. On everything. It hits lower income people much much than those with higher incomes. 10.5% affects a family with a $40,000 income a lot more than a family with a $80,000 income. A consumption tax makes no distinction and that means poor people feel it more.

      Also, as we’re seeing now, when consumption is the only way to fund the government and consumption goes down, all services from roads to police to social services take a gigantic hit. It takes longer to recover from dips in the economy.

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