Facts about extending the Bush tax cuts and the Obama tax plan

tax forms

Will the Bush Tax cuts affect your taxes? MoneyBlogNewz/Flickr.com/CC-BY

The Bush tax cuts are scheduled to expire Dec. 31. The Obama tax plan would extend for two years the Bush tax cuts for everyone except those who make at least $200,000 a year. Republicans say raising taxes on the rich will stifle economic recovery. Obama says he can’t reduce the deficit and offer tax breaks for the rich. Some analysts say the Obama tax plan won’t make a difference in reducing the deficit, while tax cuts in general won’t help the economy. But the debate is suspended for now. Democrats who say they support the Obama tax plan are too afraid to vote on it before the November elections, lest they be crucified at the polls for raising taxes.

A closer look at the Obama tax plan

Obama’s plan to raise taxes for the rich may not sting as much as Republicans claim. Bob Williams at the Christian Science Monitor took a close look at the details. He writes that to ensure no one making less than $200,000 gets a tax increase, the Obama tax plan extends the 28 percent bracket. This cuts taxes for even the richest taxpayers by a few hundred dollars. It also provides a small cushion against higher taxes for people just over the $200,000 threshold. The Tax Policy Center said only 1.7 percent of households will pay more under the Obama tax plan than if Congress extends all the Bush tax cuts. Williams wrote that the reason nearly 95 percent of that 1.7 percent would pay more isn’t because of ordinary income. They get hit when the tax on capital gains and dividends goes from 15 to 20 percent. If a Republican stalemate lets the Bush tax cuts expire, the top dividend rate hits 39.6 percent.

Why tax cuts could be the wrong idea

Tax cuts of any kind are not the way to solve the economy’s problems, according to Diane Lim Rogers writing on CNN. Rogers said extending the Bush tax cuts or implementing the Obama tax plan commits the U.S. to many more years of lost revenue, an increasing deficit, reduced saving and limited economic growth. While Obama says raising taxes on the rich will save $700 billion over 10 years, the savings is just a fraction of the $2.2 trillion cost (not including interest) of extending the Bush tax cuts for everyone else. Lim Rogers writes that deficit-financed fiscal policies (read economic stimulus) have a bigger bang for the buck in terms of boosting demand for goods and services and creating jobs. Most importantly, she writes, a temporary extension of the tax cuts won’t solve the long-term deficit problem. This is because the U.S. government can’t be trusted to let expiring tax cuts expire–as it is proving now.

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