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Thursday, September 23, 2010

Tax Post 3: The Bush Taxcuts and the Sunset Strip

Disclaimer:  I stayed up till 5 in the morning last night.  And I got to work on time this morning.  So I'm a little out of it.

Anyway, the Bush tax cuts are a big deal right now, and our tax professor has furnished me with many excellent links and class discussions on the topic.

Let me lay it out for you.  The Bush tax cuts, set to expire in 2009, are being currently reviewed for an extension for 2010.  I think it likely that they'll get passed, because of the political clout of the angry rich.  That is a link to Paul Krugman's article on this subject.  Almost every link here will give you a better treatment of the subject than I will, but I shall press on nonetheless.

So there are a couple of ways to cut taxes.  One is to cut the tax rate.  This is the graduated percentage of taxable income that you and your employer pay out of your wages, after taking the standard deduction or itemizing, you may get something back, you may owe.  The other way is referred to as backdoor tax increase, and selacious references aside, it's a really simple concept.  If you can't increase the tax rate, the only other way to increase tax revenues is to increase the tax base.  Namely, what you can tax.  Bush I was famous for his "No New Taxes" and as Clinton would razz him for later, taxes went up.  But tax rates did not.  They just made real estate more taxable.  Anyway, that was a digression.

Bush II's tax cuts in 2003 changed the tax rates.  They also backdoored a number of other tax cuts.  That's right, you can shrink the tax base too in that manner.  Think about it as a fraction, increasing or decreasing the denominator has a directly correlative effect on the take.  Enough about backdoors.  Here's the rub, take a look at the chart below:
I was looking for bracket population data to match with these numbers but haven't been able to find much save for the fact that the first bracket grosses more than 373,000 in taxable income, and comprises less than 1% of the population.  Remember, that taxable income has already had above the line and below the line deductions from it.  It is not what you get on your pay stub.  So anyone who falls into that taxbracket likely makes at least double that and half of it isn't taxed already.

Anyway, the crux of this post is this:  The reason the Bush taxcuts are expiring is because they would have never passed through Congress if they had been completely honest.  I don't mean to infer foulplay, just dirty pool.  Per a rule established in the last decade, all budget increases have to be balanced by budget cuts.  Which means that every tax cut comes with a price tag, i.e. the money that tax isn't taking in, that 4.6 percent of the top 1% taxable income (and so on down the line).   If they'd made the cuts permanent, or if they begin extending them indefinitely, it will cost the government 700 billion dollars.  But the republithugs played this pretty smart, they knew that it's harder to enact new taxes than it is to cut taxes.  Now that the cuts are set to expire the hue and cry is to keep extending them.

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