As Clock Ticks, Lawmakers Revisit Bush Tax Cuts

First in a series on tax policy.

When George W. Bush was sworn into office as president in January 2001, he inherited a record budget surplus. Five weeks later, he addressed a joint session of Congress, urging lawmakers to act swiftly on his signature campaign promise: $1.6 trillion in tax cuts.

"I hope you'll join me in standing firmly on the side of the people," the president said. "See, the growing surplus exists because taxes are too high and government is charging more than it needs. The people of America have been overcharged, and on their behalf, I'm here asking for a refund."

Republicans cheered. But Democrats were deeply skeptical of a tax cut based on projections of a $5.6 trillion surplus over 10 years that, in fact, never came about. At the time, North Dakota's Kent Conrad was the ranking Democrat on the Senate Budget Committee.

Calculate Your Tax Bill

Plug in your taxable income — that's your ordinary income like earnings and interest after you've calculated deductions, claimed exemptions and completed worksheets — to find out taxes owed under three scenarios: extending the Bush tax cuts, enacting President Obama's plan and letting the tax cuts expire. The calculator also reveals how much income is taxed at each bracket.

Calculator

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Tax Calculator

Single

Extending all tax cuts
Income bracket Tax rate
More than $382,550 35%
$175,950 - 382,550 33
$84,350 - 175,950 28
$34,850 - 84,350 25
$8,575 - 34,850 15
Up to $8,575 10
Letting tax cuts expire
Income bracket Tax rate
More than $382,550 39.6%
$175,950 - 382,550 36
$84,350 - 175,950 31
$34,850 - 84,350 28
Up to $34,850 15
President Obama's plan
Income bracket Tax rate
More than $382,550 39.6%
$195,550 - 382,550 36
$84,350- 195,550 28
$34,850 - 84,350 25
$8,575 - 34,850 15
Up to $8,575 10
 

Married

Extending all tax cuts
Income bracket Tax rate
More than $382,550 35%
$214,200 - 382,550 33
$140,550 - 214,200 28
$69,700 - 140,550 25
$17,150 - 69,700 15
Up to $17,150 10
Letting tax cuts expire
Income bracket Tax rate
More than $382,550 39.6%
$214,200 - 382,550 36
$140,550 - 214,200 31
$58,150 - 140,550 28
Up to $58,150 15
President Obama's plan
Income bracket Tax rate
More than $382,550 39.6%
$237,200 - 382,550 36
$140,550 - 237,200 28
$69,700 - 140,550 25
$17,150 - 69,700 15
Up to $17,150 10
 

"The tax cut is simply too big," he said. "No. 2, it is unfair. It goes primarily to the wealthiest among us. Forty percent of the benefit goes to the wealthiest 1 percent in this country."

Tax Cut Series Overview

And House Democratic Leader Richard Gephardt of Missouri had a dire warning: "This is a mistake that we will pay for for years to come!"

Nonetheless, Republicans pushed two big tax packages through Congress in 2001 and 2003. The measures cut marginal rates on personal income taxes. They gradually reduced the estate tax so it disappeared altogether this year. In 2003, they slashed taxes on dividends and capital gains. But to comply with budget and procedural rules, Republicans had to let all those cuts expire, most of them after 10 years. And that is why the clock is now ticking down to Dec. 31 — when tax rates will return to pre-tax cut levels unless Congress acts.

Brown University congressional expert Wendy Schiller says that has put the Democrats in a tough position. If the tax cuts expire, the nation's fiscal outlook takes a great leap forward. "But if you let them expire," Schiller says, "then you're absolutely vulnerable to a charge of raising taxes."

The Tax Cut Debate: What's On The Table

Here, highlights of the tax changes enacted by President Bush in 2001 and 2003, and those proposed by the White House.

2001 and 2003
Tax Cuts
President
Obama's Plan
Marginal rate reductions
Reduced rates from:

39.6 percent to 35 percent
36 percent to 33 percent
31 percent to 28 percent
28 percent to 25 percent
Expanded the 15 percent bracket
Created a 10 percent bracket
Roll back only the tax cuts affecting high-income taxpayers — couples earning more than $250,000 and single filers earning more than $200,000. The top two tax rates would increase from 33 and 35 percent to 36 and 39.6 percent, respectively.
Deductions, credits and personal exemptions
Increased the child tax credit to $1,000 per child and the amount eligible for credit on dependent child care. Continue current law.
Phased out limits on itemized deductions and personal exemptions for high-income taxpayers. Retain current law except as it applies to high-income taxpayers. Personal exemptions would be reduced for couples earning more than $250,000 and single filers earning more than $200,000. Itemized deductions (like those for mortgage interest and charitable donations) would be capped to the 28 percent bracket.
Marriage penalty
Increased the standard deduction for married couples filing a joint return. Continue current law.
Capital gains and dividends
Lowered the top rate on qualified capital gains and dividends to 15 percent — zero percent for taxpayers in the 10 and 15 percent brackets. Retain the zero and 15 percent rates but impose a 20 percent rate on capital gains and dividends for taxpayers in the top two income tax brackets.
Estate tax
Gradually increased the amount exempted from the estate tax until the tax was fully repealed in 2010. Continue estate tax relief at 2009 levels: a $3.5 million estate tax exemption and maximum 45 percent rate.
Alternative Minimum Tax
Boosted the AMT exemption amounts to stem its reach to middle-income taxpayers — a so-called "patch" that Congress routinely passes. Index the AMT for inflation and extend the patch through 2020.

Democrats are facing tough midterm elections. Republicans are already saying Democrats will let the biggest tax hike ever take place Jan. 1. "They seem proud to be raising taxes," said South Carolina Sen. Jim DeMint, "so we just need to make sure that America knows that."

But here's what the White House wants America to know: President Obama is sticking to his campaign promise to permanently extend tax cuts on all household income below $250,000. The president underscored that commitment while speaking in the Rose Garden last week.

"As Congress prepares to return to session," the president said, "my economic team is hard at work in identifying additional measures that could make a difference in both promoting growth and hiring in the short term, and increasing our economy's competitiveness in the long term — steps like extending the tax cuts for the middle class that are set to expire this year."

Extending those so-called middle-class tax cuts would cost the Treasury about $3 trillion over the next decade. Extending them for the top income tax brackets would cost another $700 billion. But Democrats say those cuts, which affect about 2 percent of taxpayers, should not be extended. Last month on ABC's This Week, House Speaker Nancy Pelosi defended letting those tax breaks lapse.

"I don't see any reason why we should renew a tax cut that only gives a tax cut to the wealthiest people in America, increases the deficit, and doesn't create jobs," she said.

Republicans say that's a recipe for disaster.

"The question is, should you be raising taxes?" says the Senate's No. 2 Republican, Arizona's Jon Kyl. "The answer is no! And so if the answer to that is no, then leave the tax rates where they are."

More and more congressional Democrats are also taking that view. One of them is that earlier tax cut critic Kent Conrad, who now chairs the Budget Committee.

"Because the economy continues weak, I would prefer to continue all the tax cuts, including those for the top end," he said, "but to sunset those for the top end at a time certain."

That time, Conrad says, could be 18 months from now if the economy is stronger. But with Republicans poised to pick up seats in the midterm elections, other leading Democrats prefer using the clout they still have to let the tax cuts for the wealthiest lapse. When asked last month whether tax breaks for the wealthy should be extended, Finance Committee Chairman Max Baucus said no: "I think not at this point. It's not necessary, frankly."

Baucus says the Senate will take up the expiring Bush tax cuts later this month. That could present Republicans with a tough choice: They could reluctantly back a partial extension of the tax cuts as proposed by Democrats, or they could block it, and risk also being blamed if taxes go up Jan. 1.

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