Even as they agree that taxes shouldn’t rise on the middle class when the economy is still weak, some liberals are worried by the prevailing Democratic view that the bulk of the Bush tax cuts should be made permanent. Liberals fear that lower revenue means less money for domestic programs, such as education, as well as for the social safety net.
The Bush tax cuts involve a long list of provisions, including lower federal income-tax rates for all Americans, lower tax rates on investment income such as capital gains and dividends, and tax benefits for married couples with children. The scheduled expiration of the Bush cuts, combined with an end to other temporary tax cuts enacted more recently by Obama and deep spending cuts, constitute the fiscal cliff, which is to take effect in January barring action by Congress. These dramatic fiscal changes could tip the U.S. economy back into recession.
Although primarily targeted toward households earning less than $250,000, the middle-class component of the Bush tax cuts also benefits those earning above that. The first $250,000 earned by even the wealthiest families is subject to lower rates. For this reason, Obama noted last month that under his proposal, “every American, including the wealthiest Americans, gets a tax cut.”
For instance, an individual taxpayer earning between $200,000 and $500,000 a year would pay an average of $515 more in taxes next year if the Bush tax cuts for the wealthy expire, according to the nonpartisan Tax Policy Center. But if all the Bush tax cuts were to vanish and the rich had to pay higher rates on all their income, their tax bills would shoot up by an average of $6,000. The very richest — the top 1 percent of earners — would pay much higher taxes if solely the upper-income tax cuts expire, because the savings from extending the rest of the rates would be relatively negligible.
In 2001, when Bush proposed the tax cuts, Democrats argued they would benefit the wealthy, create long-term deficits and deprive social programs of needed money. Some Democrats at the time were open to a more modest tax cut, especially one less favorable to the rich. Bush could push his tax cuts through Congress only by agreeing they would expire a decade later.
Under GOP pressure, Obama renewed them in 2010. He has vowed not to extend the upper-income tax cuts again. He is also demanding that at least $400 billion worth of tax breaks for the wealthy be eliminated to further reduce the deficit.