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The Wealthy Don’t Need Bonus Tax Cuts

SOURCE: AP/Ron Edmonds

President George W. Bush signs his $1.35 trillion tax cut bill Thursday, June 7, 2001, at the White House. Extending the Bush tax cuts for the wealthiest Americans would only cost them a fraction of the wealth they accrued over the past decade.

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It’s the big debate in Washington—extend the “tax cuts for the middle class” alone or include the “tax cuts for the wealthy,” too. A choice between “us” or “them and us.” But really, it’s not a question of whether everyone gets their tax cuts extended. It’s a question of whether everyone gets something and the rich get a bonus.

Remember, these are the tax cuts of George Walker Bush. You think he really passed a “middle-class tax cut”? Even the so-called “middle-class” cuts actually give more money to the best-off 20 percent of Americans than they do to everyone else. To oversimplify, these cuts reduce everyone’s taxes on their first $250,000 of income ($200,000 for singles). Of course, if you only have $50,000 of income then you don’t get the full benefit—you just get a tax cut on $50,000 of income. But if you have $1,000,000 of income, you get a tax cut on $250,000 of income. Yes, the middle class benefits from these cuts but so do the wealthy.

Average tax cut under Obama proposal

The rest of the tax cuts, the part that President Barack Obama doesn’t want to extend, are an added bonus for the rich. They only go to the wealthiest 2 percent.

Average bonus tax cut

Extending the “everyone tax cuts” (to coin a more accurate name) makes some economic sense right now. Middle-class people are hurting in this recession and in the end it’s the middle class that’s going to bring the economy back—getting back on their feet as consumers, homebuyers, and savers. Some of the “everyone” cuts end up going to the rich but that too helps some and it’s not as skewed as the bonus cuts.

What we really don’t need is to give the wealthiest 2 percent a bonus. This will do little to help the economy and create jobs.

There’s another thing, though. Even if, despite massive evidence to the contrary, you believe that indiscriminately showering money on the wealthy is the way to get the economy moving again, that’s actually already been taken care of completely independent of tax policy. Despite the $830 billion, 10-year price tag of the bonus tax cuts, it’s nothing compared to how much the well-off have accumulated in recent years just by their astronomical income growth fueled by Wall Street bonuses, rising CEO pay, and the rest.

Allowing the Bush bonus tax cuts on the wealthiest 2 percent of Americans to expire—the cause célèbre of conservatives in Congress—would in fact take back from the wealthiest 1 percent only a fraction of what they gained in income under President Bush. Conservatives assert that these tax breaks are essential to the health of our economy, central to the American way of life, and are worth allowing a middle-class tax increase to happen in order to save these bonus tax cuts for the rich. But that’s a hard case to make when you look at the numbers.

From 2003, when the second major Bush tax cut passed, to 2007, the last year for which reliable data are available, income for the top 1 percent of Americans went up by 61 percent, according to the Congressional Budget Office. [1] Yes, the Great Recession which began in 2007 at the end of the Bush presidency undoubtedly cut into those gains—but with the stock market now back up to pre-recession levels, record corporate profits, and Wall Street bonuses again flying high, we can feel safe in assuming that this group is again doing just fine.

We all know the arguments about how important this group’s well-being is to the overall health of the economy. But, whatever the validity of those arguments, how big a cramp in the style of the wealthiest 1 percent would it be to let the tax cuts targeted exclusively at the very top expire? The answer is that it would reduce their income by less than 4 percent. [2] Note that this not only pales in comparison with the 61 percent income gain in the just four years from 2003 to 2007 but it is also less than the single-year income gain for this group in 18 of the 25 years ending with 2007 (everything here is adjusted for inflation, by the way).

Change in after-tax income among richest 1 percent of AmericansThere are lots of other comparisons one can do. The income of the top 1 percent doubled since 1995 and tripled since 1983. In 2005 alone their income went up by 20 percent. Any way you tell the story it’s the same—asking this group to contribute 4 percent more of their income is a tiny task relative to what they’ve gained, and will have a trivial impact on their behavior and their contribution to the economy.

At the rate their income has risen over the last 25 years, counting good times and bad, the amount that they pay in additional taxes will be recouped in a matter of months. In contrast, what our nation will gain from giving the wealthiest of Americans a new bonus tax cut, on top of the tax cut everyone is getting, is a higher national debt of more than $830 billion over 10 years. It’s an easy choice.

Average after-tax income among Americans making more than $500,000It isn’t class warfare, or envy, or any other of the labels that get attached to this sort of argument that underpins this conclusion. It’s just cold hard facts. There are people in this country that could use a tax cut and there are people who don’t need one. There are ways to cut taxes that can help the economy and there are ways that don’t. Let’s do the tax cuts that are best for the country, not hand out another bonus for no good reason.

Michael Ettlinger is Vice President for Economic Policy at the Center for American Progress.

Endnotes

[1]. Author’s calculations using: Congressional Budget Office, "Average Pre-Tax Income for All Households, by Household Income Category, 1979-2007," available at http://www.cbo.gov/publications/collections/tax/2010/average_before-tax_income.pdf.

[2]. Author’s calculations using: Citizens for Tax Justice, "Comparing President Obama’s Tax Plan and Senate Republicans’ Tax Plan," available at http://www.ctj.org/pdf/bushtaxcuts2010.pdf.

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