Extension of Tax Cuts, More Benefits to the Wealthy
Posted in Money by George
President Bush just signed a tax cut extension, with additional provisions mostly directed at investor-related taxes. A short summary follows:
- Extends tax breaks on capital gains and dividends
- This is fine…
- Alters the exemption range for the Alternative Minimum Tax
- According to the New York Times: “Most of the beneficiaries are likely to be married couples with children who own their homes and make $75,000 to $500,000 a year.”
- Allows anyone to convert to a Roth IRA, regardless of income.
- Before, if you made too much money, you were not allowed to use a Roth IRA. Now, you are allowed to convert.
- Initially this will raise a small amount of money, however, in the long run, this is going to cost the government billions in tax dollars because Roth IRAs are not taxed after the money is put in.
- This will also mostly benefit richer Americans.
Another quote from the New York Times article on the tax cut:
The Tax Policy Center, a nonprofit venture of the Urban Institute and the Brookings Institution, two policy and research groups in Washington, estimated yesterday that 80 percent of the tax savings would flow to the top 10 percent of taxpayers and that almost a fifth of the benefits will go to the top one-tenth of 1 percent.
My questions are as follows:
- If we are already experiencing a growing gap between the rich and the poor, why are we passing taxes to make this gap larger?
- If we already have a gigantic national debt, why are we cutting taxes? Don’t we need money?
Note: I’ll admit I don’t know much about taxes. I have taken plenty of economics classes, but no tax related ones, so other than brief knowledge, I don’t know what I’m talking about. So, please, if I’ve said something ridiculous, correct me.
May 18th, 2006 at 11:06 am
Thanks once again to Lance for the article idea.
May 18th, 2006 at 12:02 pm
Looked at in dollar terms, the differential treatment of various income groups is even more striking. The average tax cut for the 20 percent of households in the middle of the income spectrum would be just $20. But the average tax cut for those in the top one percent of the income spectrum would be $14,100. For those with incomes above $1 million, the average tax cut would be $43,000.
From: http://www.cbpp.org/5-4-06tax.htm
May 18th, 2006 at 12:23 pm
Well there are several things worth pointing out I think when it comes to tax policy.
Statements like “the gap between the rich and poor is growing” are used to obfuscate the issue. This is only an issue of the richer are becoming richer and the poor are becoming poorer. However, this is not the case. The rich are becoming richer and the poor are becoming richer. The rich just are becoming richer faster.
Thus both gains but one is gaining quicker.
Tax cuts will always favor the more wealthy. Because you have to pay taxes in order to benefit from paying less taxes. Following the 2003 tax cuts the bottom %50 of earners only made up 3.46% of the revenue. This is a highly progressive system.
The Alternative Minimum Tax is increasingly hurting the middle class and so thats why its being reformed. The ironic thing about the 2003 cuts was that some of their impact was limited because of the AMT. This aims to fix part of that.
Our national debt is an interesting phenomenon. On the whole the Debt is not overly large relative to GDP. The goverment debt is roughly 50%. For example if debt is 60% of GDP. If the economy grows at 5% a year then they can maintain a deficit of 3% a year without any increase to Debt/GDP. Debt stabilization is whats important (assuming that debt is not at an obscene range). The US debt is not. It is roughly on par with the EU average and is behind such wild nations as Italy (over 100% or at least late in the 90s it was)
The worrying aspect is that the 3% deficit is running even during a booming economy. However the surge in govt receipts following the 2003 tax cuts would indicate that the government is not running a deficit for lack of funds. Rather it is spending too much. Some of this is unavoidable, i.e. the war. Some of it is not i.e. pork.
However, much of fiscal policy is now out of appropriators hands because it is tied up in entitlements.