The Stock Market and Economy

Tax Cuts, Round Four

The Bush administration is pushing hard on its friends in Congress to get some tax cuts passed for the fourth summer in a row.   This time most the things that they are looking for are extensions of some of the tax cuts passed in 2001 that are set to expire in 2005.  This includes: the 10% tax rate, which will otherwise change back to a 15% rate at the end of the year; the $1,000 per child, which is otherwise set to fall to $700 per child at the end of this year; and the larger standard deductions for married couples, which are otherwise due to shrink back to where they were three years ago.  For all of these, the Bush administration wants to the extension to be for five more years.

I have no problem with extending any of these changes in the tax code.  My only question in that regard is how the White House can justify only looking for a five year extension of these tax provisions rather than simply making them permanent.  Of course we all know the real reason: if the tax cuts are formally supposed to expire in five years, then the long term budget projections look slightly less horrible than they really are.

But there are a few other proposed provisions to this tax cut that are new, rather than simply extensions of previous tax cuts.  In particular, some Congressional Republicans want to change the AMT (which is probably necessary if they don’t want the effectively undo the tax cuts of the past few years), and extend the child tax credit to wealthier families who can not currently benefit from it.  Currently families can not claim the full tax credit of $1,000 per child if they make over about $110,000.  Some Congressional Republicans want to extend this so families with income of up to $250,000 can claim the tax credit.  Such a provision would probably cost $3 to $5 billion per year.

What’s the argument for giving this additional tax break to families earning over $100,000?  I am going to be charitable and believe say it is because Congressional Republicans genuinely think that those families pay too much in taxes right now, and need tax relief.  The thing is, they’ve already gotten lots of it.  The following table shows the effective tax rates paid by income bracket in 2003 (including both income and payroll taxes) in two scenarios: +in the hypothetical scenario where the tax laws had remained just as they were when Bush took office, and in reality, given the actual tax laws in 2003.  (Estimates are from the Tax Policy Center.)  The last column shows the difference, which is the effective reduction in tax rates over the past 3 years.

Source: Tax Policy Center tables, available here.

Unsurprisingly, wealthy households have seen the biggest falls in their tax rates.  So is it really possible to argue that the US government, if it is going to spend an additional several billion dollars per year reducing people’s taxes, really should spend it on those households again?