Why Should We Care About Tax Breaks for the Wealthy?

It seems impossible these days to read a newspaper — or watch what passes for TV news — without encountering diverse stories and views on the battle over the Bush tax cut extensions.

Virtually all the attention centers on the top income tax rates for the wealthiest 2% of households, i.e., those whose adjusted gross incomes exceed $250,000.

I emphasize “adjusted” because we’re not talking here about couples whose combined take-home pay is more than $250,000. The 2% at issue are only those whose returns show that much after they’ve taken all the personal exemptions and deductions they’re eligible for.

We’re also certainly not talking about small business owners whose enterprises bring in more than $250,000.

Those who pay taxes on their business income as individuals aren’t all small business owners — not, in fact, any sort of business owners as we ordinarily understand the term.

Those who actually operate businesses pay taxes only on profits, i.e., what remains after they deduct for expenses, including wages.

So even those who have — or might put — people on their payrolls could hire and retain as many as they needed, even if the rates on the highest fractions of total AGI rose.

None of this means we’re not going to hear more from the Republicans about how letting the top brackets revert to their pre-Bush levels will “destroy” jobs.

They’ve got to find some way to win over voters who think the top 2% should pay their fair share — and at this point, aren’t.

What we’re hearing less about are other types of tax cuts that benefit only the top 2% — or, in other cases, give them much bigger breaks than lower-income households enjoy.

The maximum capital gains rate, for example, is now just 15%. The same for qualified dividends, i.e., corporate earnings distributions linked to shares held for more than a minimum period of time.

These, of course, deliver far greater benefits to the very wealthy than the rest of us. They’ve been a major factor in growing income inequality, as a recent Congressional Research Service analysis shows.

Extending them would cost $34 billion a year in lost revenues, according to Treasury Department estimates parsed by the Tax Policy Center.

And then there’s the estate tax.

The first round of Bush tax cuts gradually increased the dollar value of assets that could pass untaxed to heirs from $1 million to $3.5 million — double that for a couple. Also phased down the top tax rate on the rest, leaving it at zero for 2010.

A prospective death sentence for the cleverly-renamed “death tax,” since Republicans then sought to make the 2010 repeal permanent.

President Obama, however, wanted to reinstate the already-generous 2009 version of the tax. Republicans ultimately got him to agree to a further cut — a $5 million exemption ($10 million for couples) and a top rate of 35%.

This is higher than what large estates actually pay. After deductions, credits and the like, the effective, i.e., actual, rate is more like 14.4% — considerably less for the 50 or so small business and farm estates that will owe any tax this year.

The post-2001 estate tax is expiring now, along with the rest of the Bush tax cuts, expanded and otherwise. Republicans insist that the current version must be extended.

The Center on Budget and Policy Priorities reports that the Republicans’ plan would benefit heirs of only the wealthiest 0.3% of estates — giving them, on average, $1.1 million more than they’d get under the 2009 version of the tax.

Well, why should we begrudge these heirs the extra wealth? Wouldn’t that be just another case of what leading Republicans call class warfare?

Set aside the issue of income inequality. Consider instead the deficit.

The federal government would forfeit an estimated $119 billion over the next 10 years if the current version of the estate tax is extended.

It would gain $432 billion over the same period if the estate tax reverted to its pre-Bush level, not counting savings on debt interest. But no one’s going to put this on the bargaining table.

What’s dead center on the bargaining table is how to hit the deficit reduction targets imposed by the Budget Control Act by some means other than the across-the-board cuts scheduled to start in January.

What we give away in revenues will ultimately have to be made up somehow. And where will Congress look?

Not to the Defense Department for sure. But like as not to already-underfunded programs that benefit low-income people.

Anyone who doubts this need only look at what’s in store for food stamps.


6 Responses to Why Should We Care About Tax Breaks for the Wealthy?

  1. ladybuddha says:

    Greetings. I enjoy reading your blog. Will you consider adding share buttons for social media?

  2. Thanks for this piece. And especially in DC we should care about the continued subsidization of wealthy residents because of our regressive local tax structure. The latest figures from ITEP show that the top 1% of families earning $3 million per year pay an effective rate of 6% of their income in DC taxes (sales, property and DC income tax) while the bottom 20% of families earning just over $10K per year pay 7%, with the working/middle class paying 9-10%. Most of the so-called Democrats on our Council, supported by our Mayor, have refused to make our local tax structure progressive by hiking the top 5% tax rate. Democrats? They act more like Republicans by refusing to take the lead of our President in pledging to repeal the Bush tax cuts for incomes over $250K. We could significantly reduce if not eliminate child poverty in DC if a modest tax hike were applied to our top 5%, with $100 millions of additional revenue accrued. Shame on our Mayor and Council!
    And watch out, the head of new tax revision commission is Tony Williams, the local architect of “balancing the budget on the backs of the poor”. Tony is also the new CEO of the Federal City Council.

    David Schwartzman
    DC Statehood Green Party Candidate
    U.S. Senate

  3. Kathryn Baer says:

    Thank you for these details about our local tax structure, David. As I think you know, I’ve supported a more progressive system for a long time.

    There’s a connection between our local structure and the federal tax cuts that are now at issue. Specifically, our EITC is linked to the federal credit. If, as the Republicans want, the federal EITC reverts to its pre-2009 limits, local tax burdens on low and moderate-income working families in the District will increase. See, http://bit.ly/NnU1vi

  4. Kathryn Baer says:

    I’ve added a couple of share buttons. Are there any others you think I should add?

  5. ladybuddha says:

    Hi, thanks for the share buttons! I noticed you added them, but didn’t realize you’d commented back! I’d say you can add Tumblr and G+, too.

  6. […] I noted earlier, Republicans in Congress have nevertheless insisted that the current version of the estate […]

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