Extending Tax Cuts to Millionaires: Still a Terrible Idea

President and Lawmakers Should Resist Proposals to Extend Income Tax Cuts for $1 Million of Income

The idea that Democrats and Republicans might “compromise” by extending the Bush income tax cuts for the first $1 million a taxpayer makes is back in the news, and it’s still a terrible idea.

Bill Kristol, editor of the right-ring Weekly Standard, said on Fox News that Congressional Republicans should be willing to give in on taxes, at least when it comes to higher taxes on millionaires. That set off chatter among some political observers and media outlets that perhaps there was a room for a “compromise” with Congressional Democrats, some of whom have called for extending the Bush tax cuts for income up to $1 million, rather than $250,000 for couples and $200,000 for singles as proposed by President Obama.

Here’s why the idea is absurd: Obama’s approach to the Bush tax cuts is already a huge compromise for the many lawmakers who originally opposed the Bush tax cuts. Remember, President Obama’s proposal is to extend 78 percent of the Bush tax cuts (in terms of revenue). His proposal would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent, and would extend much of the Bush estate tax cut so that only 0.3 percent of deaths would result in estate tax liability.

In May, House Minority Leader Nancy Pelosi floated the idea of extending the income tax cuts for up to $1 million of income. CTJ estimated that this would reduce the revenue savings from Obama’s approach to the income tax cuts by 43 percent. (This was later confirmed by the Joint Committee on Taxation.) We also found that people making over $1 million would get half of the additional tax cuts that would result from moving the threshold from $250,000/$200,000 to $1 million.

Married Couples Making $250k to $300k would Lose Just 2% of their Tax Cuts under Obama’s Approach. So Why Should We Extend Even More Tax Cuts?

People have asked us how extending the tax cuts for income up to $1 million could possibly help people who make over $1 million. The answer is that all of these proposals would extend reductions in income tax rates for all the income a taxpayer makes up to whatever threshold is being proposed. Obama’s proposal would extend the income tax cuts for the first $250,000 a married couple makes. That means that a married couple making $300,000 would only pay the higher, pre-Bush tax rates on $50,000 of their income (at most).

Similarly, Pelosi’s proposal (which she subsequently backed away from) would extend the income tax cuts for the first $1 million a family makes. That means that a family making $1.1 million would pay the higher, pre-Bush tax rates on just $100,000 of their income (at most).

Many people, including those who write about these issues and enact tax laws, have failed to appreciate this. Much of the debate has revolved around whether or not people who make $250,000 should be considered “rich” if they live in higher-cost areas. This debate is utterly beside the point because someone making $250,000 would not have to give up any of their tax cuts under Obama’s proposal.

In fact, a CTJ study found that married couples making between $250,000 and $300,000 would lose just 2 percent of their Bush-era income tax cuts under President Obama’s proposal. People making up to half a million dollars would keep most of their tax cuts.

Congresswoman Nita Lowey of Westchester, NY, is one of the Democrats who have made noises about moving the threshold from $250,000 to $1 million. Her comments on the issue reflect this lack of understanding.

Earlier this year, she told the Star Gazette that “If you are making $200,000 and are a fireman and a teacher, you are not feeling too rich with all the property taxes and all your expenses. But when you are making over $1 million, you ought to pay your fair share so we can support basic services in our communities.”

Even if Rep. Lowey’s district is some Bizarro World where fire fighters and teachers make $200,000 a year, they would not lose any portion of the Bush tax cuts under President Obama’s approach. And they certainly are not going to be helped by extending the tax cuts for even higher levels of income.