As the House prepares to vote tomorrow on whether to extend President Bush’s tax cuts for families making under $250,000, it’s worth revisiting the main reasons why it would be unwise to extend the tax cuts for families making over $250,000 at the same time, as many in Congress favor.
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.
Few small businesses would be affected. 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.
Extending the high-income tax cuts would be extremely costly. We estimate that it would add nearly $1 trillion to the nation’s publicly held debt over the next decade, consisting of about $700 billion in reduced revenues and nearly $300 billion in higher interest payments on the debt.
There’s been a dramatic shift in incomes toward the top in recent decades, and extending the high-income tax cuts would make it worse. The average middle-income American family had $13,000 less after-tax income in 2007, and an average household in the top 1 percent had $782,600 more, than they would have had if incomes of all groups had grown at an equal rate since 1979. The Bush tax cuts have contributed to this trend 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.
Wealthy households will benefit handsomely even if Congress extends only the “middle-class” tax cuts. That’s because the first $250,000 of their income would continue to be taxed at the current lower rates. In fact, a family making more than $1million 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 Congress extends the middle-class tax cuts.