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Another option for the expiring Bush tax cuts

August 19, 2010 - Mike Maneval

While other issues are at the forefront right now, the expiration date on the 2001 and 2003 tax cuts signed by President George W. Bush looms and the debate on the best course of action will be contentious. The advocacy group Americans for Tax Reform lists a number of provisions which will be reversed if no action is taken. The tax rate on earned income would increase by anywhere from three to five percent, depending on level of pay. Inheritances would be taxed again, and the tax rate on capital gains would rise by 5 percent. Speaking broadly, three options, to varying extents, are surfacing in the debate.

The Republican caucus in Congress, as Howard Gleckman reports at the Christian Science Monitor's website, is adamant the tax cuts should be renewed with no significant changes. Most Democrats, according to Gleckman, want to allow an increase in the two top brackets of the earned income tax, while renewing the cuts for the first three brackets, fulfilling in the eyes of many President Barack Obama's campaign pledge not to raise taxes on families earning less than $200,000.

Others, like Alan Greenspan, former chairman of the Federal Reserve Board, have recommended doing nothing, and allowing the tax cuts to expire for all Americans. Greenspan, money.cnn.com reported in mid-July, recognizes such a course would impede growth but says curtailing the debt and deficits warrants it.

I would suggest a fourth option.

Renew the cuts to the earned income rates for the wealthy, middle-class and poor, or better yet replace the cuts - a five-percent cut for the lowest bracket between 10 percent and 15 percent and a 4.6 percent cut for the highest bracket between 35 percent and 39.6 percent - with a larger, across-the-board cut of 8, 9, maybe 10 percent. A 10-percent cut to the original rates would give working families earned income tax rate brackets of 5 percent, 18 percent, 21 percent, 26 percent, and 29.6 percent.

Someone like Greenspan might scoff at this first step, and point to the explosive effect it would have on the deficit. Which is why I not only favor allowing the tax cuts for estates, capital gains and other sources of unearned income to expire, but raising the rates to higher and more progressive levels, with top brackets approaching 75 percent. It would recuperate the revenue lost to the sort of broad tax cut for working Americans advocated in the first step, which along with spending cuts and entitlement reform could position America to lift itself out of its debt. It also would help move America away from a perennial debate likely to taint the debate on the expiration of specific tax cuts: a debate between prioritizing the wealthy and middle-class.

The Democrats most frequently make the error of casting the debate in these terms; for one such example look no further than Obama's figurative line in the sand of $200,000 a year. This error, repeated with regularity over the past 30 years, fails to acknowledge the underlying truth that certain jobs have a higher threshold of responsibility and difficulty and deserve better compensation.

Shifting the tax burden from earned income to unearned income, as I've proposed with these two steps, does not divide airline pilots and engineers from waitresses and assembly-line workers. It prioritizes all Americans willing to work for what they take, and only divides hard-working Americans from people who want to take, and take and take, without working.

 
 

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