Economic snapshot | Budget Taxes and Public Investment

Bush tax cut extension for top brackets would bestow windfall on wealthiest Americans

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President Obama began this week calling on Congress to pass a one-year extension of the Bush tax cuts for households making less than $250,000 in adjusted gross income ($200,000 for single filers). In contrast, the GOP continues to push for the permanent extension of all the Bush tax cuts, which are due to expire at the end of this year.

The Bush tax cuts—estimated to have added $2.6 trillion to public debt from 2001-2010—boosted the after-tax income of filers by an average of 3.2 percent in 2011, but this average is overwhelmingly driven by the top of the income distribution, according to the Tax Policy Center. While the Obama administration is proposing to roll back these tax cuts for the top two brackets beginning in 2013 (affecting around 2 percent of filers), congressional Republicans are adamant about keeping the cuts in place for those at the top of the income distribution. The graph below illustrates the difference between the administration’s desired policy for the top two brackets and the policy supported by most congressional Republicans. For tax units (either an individual or a married couple who file a tax return jointly, along with all dependents included on the tax return) in the top 1 percent of the cash income distribution (income break at $569,944),1 this policy difference means an average cut of almost $25,000 in 2013 alone. For tax units in the top 0.1 percent of the cash income distribution (income break at $2,474,273), this policy difference means an average cut of around $140,000 in 2013.

Keeping the Bush tax cuts in place for the top two brackets is extraordinarily expensive. Furthermore, targeting tax cuts to the highest earners is poor economic stimulus. High-income individuals are less likely to spend extra dollars of disposable income; Moody’s Analytics Chief Economist Mark Zandi estimates that making the Bush tax cuts permanent would generate only 35 cents in economic activity for every dollar in forgone revenue. Other targeted credits, meanwhile, could have much higher economic impact.


Endnotes

1. Income breaks from Tax Policy Center table, “Income Breaks for the 2011 Tax Model (0411 Series), 2004-2022,” http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=3047.


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