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Reality Check on the High-Income Tax Cuts

As the debate over whether to extend the Bush tax cuts for families over $250,000 heats up, here are a few facts to keep in mind:

  • Wealthy households will benefit handsomely even if Congress extends only the “middle-class” tax cuts. A family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000, if (as expected) Congress extends the middle-class tax cuts.
  • Extending the high-income tax cuts is one of the least effective ways to stimulate the economy. In fact, the Congressional Budget Office judged it the worst of all options under discussion for preserving or creating jobs and boosting economic growth while the economy is weak. As former Federal Reserve Vice Chair Alan Blinder has explained, it would be more economically efficient to let the high-income tax cuts expire to and use the proceeds to advance policies that create more jobs and growth in the short term, while devoting the savings to deficit reduction after that.
  • There’s been a dramatic shift in incomes toward the top in recent decades, and extending the high-income tax cuts would just make it worse. Between 1979 and 2007, the share of the nation’s total after-tax income going to the top 1 percent of households more than doubled (from 7.5 percent to 17.1 percent) while the share going to the middle fifth of Americans fell (from 16.5 percent to 14.1 percent). The Bush tax cuts have contributed to this by providing the largest benefits — both in dollar terms and as a percentage of income — to people at the very top. People making more than $1 million get an average of about $125,000 each year in tax cuts, according to the Urban-Brookings Tax Policy Center.
  • Few small businesses would benefit. Only the top 3 percent of people with any business income would benefit from an extension of the high-income tax cuts. This 3 percent of filers receive large amounts of business income (as tax-cut proponents note), but that’s hardly a reason to extend their tax cuts. Instead, it reflects the fact that these filers generally are very wealthy individuals, many of whom are partners in large corporate law firms or Wall Street bond traders who participate in investment partnerships — not owners of small family businesses.
Chuck Marr
Vice President for Federal Tax Policy