Taxpayers are staring into an abyss at the end of this year. Unless Congress changes current law, all of the Bush and Obama tax cuts will expire, and federal taxes will rise by $500 billion, or about $3,500 per household on average.
But averages don't tell this story, because some of the tax cuts and credits favor the wealthy, others help low-income Americans. The middle class falls, well, in the middle. But the design and effects of these various tax provisions explain the partisan deadlock between Republicans and Democrats about which cuts should be extended.
According to a study by the Tax Policy Center, the two biggest increases for most households would result from the expiration of the 2 percentage point cut in Social Security taxes, which are taken directly out of wages, and the end of the Bush tax cuts. Bush cut the tax rate on the lowest income bracket from 15 percent to 10 percent, on the middle bracket from 28 percent to 25 percent, and on the highest bracket (over $397,000) from 39.6 percent to 35 percent.
The Bush cuts also phased out taxes on long-term capital gains for people in the 15 percent tax bracket and below, and reduced the rate from 20 percent to 15 for other taxpayers. That is huge for people whose income derives partially or primarily from investments.
In addition, the Bush cuts also reduced the tax on qualified dividends from the rates on ordinary income (as much as 39.6 percent) to a maximum rate of 15 percent. Again, that's a huge boon to the wealthiest taxpayers.
Low-income households, by contrast, would be particularly affected by the end of various credits that Democrats extended or created as part of the stimulus law in 2009. Included are child credits, the Earned Income Tax Credit and expanded credits for households with children in college.
The rich, in addition to taking a big hit if the Bush tax cuts expire, will be subject to new taxes under the Affordable Care Act, otherwise known as Obamacare. People with incomes above $250,000 for couples and $200,000 for singles will pay a .9 percent tax on amounts over those thresholds. They also will pay a new 3.8 percent tax on capital gains, dividend and interest income above those thresholds.
This explains the unpopularity of the ACA among the wealthy, and the Republicans who represent them. It also explains why President Obama and the Democrats are proposing extentions in tax cuts only for those with incomes below $250,000.
Allowing all of the tax cuts to expire would devastate the economy. Extending them all would keep deficits high. Republicans, pick your poison.