Even if the rates lapse, the wealthy still get a cut

EVEN IF THE RATES LAPSE, THE WEALTHY STILL GET A CUT…. One facet of the debate over Bush-era tax policies has been a little misleading.

When Republicans originally lowered the rates, they set the breaks to expire in 2010. Democrats now proposed keeping the cuts for the middle class, but letting the lower rates for the wealthy expire. Republicans counter that the richest Americans needed protecting, even if it adds $700 billion to the deficit.

But the detail that’s often overlooked is that the wealthy won’t go back to paying pre-Bush rates, even if their tax breaks expire — because tax rates are marginal, if Dems keep lower rates in place for the middle class, the rich will still benefit.

As debate heats up over President Obama’s proposal to let the Bush tax cuts expire for the wealthy but to extend them for everyone else, a nonpartisan Congressional analysis circulated on Capitol Hill on Tuesday provides a look at the impact the plan would have on high-income taxpayers.

Given the progressive nature of the federal income tax system, in which tax rates increase with income, even the richest households would continue to pay the four lower rates on up to the first $250,000 of their income, under the approach being pushed by Mr. Obama and Democratic leaders in Congress.

The president has vowed to extend the tax cuts for individuals with less than $200,000 in annual taxable income and couples with less than $250,000 — about 98 percent of American households. About 315,000 households report adjusted gross income of $1 million or more.

Taxpayers with income of more than $1 million for 2011 would still receive on average a tax cut of about $6,300 compared with what they would have paid under rates in effect until 2001, according to the analysis, which was prepared by the Joint Committee on Taxation at the request of the Democratic majority on the House Ways and Means Committee.

Got that? The lower rates will still be applied to the first $250,000 the wealthy earn, meaning they won’t return to pre-Bush levels.

In other words, as far as the richest Americans are concerned, this is a debate over how big a break over the 2001 rates they’ll get. Democrats, by looking out for the middle class, would offer a tax cut worth about $6,300 to the wealthy, while Republicans insist that’s not nearly generous enough for those poor high-income earners.

For both parties, the dispute has become a defining one as they hone campaign arguments heading toward November.

Speaking of Republicans at a fund-raiser in a wealthy community near Dallas on Monday, Mr. Obama told Democratic donors, “What you see is a governing philosophy on their part that basically comes down to ‘We’re going to extend tax cuts for the wealthiest among us’ — folks who don’t need those tax cuts and weren’t even asking for them, which would cost $700 billion.”

Yep, that’s about right.