What would it actually mean for us if the Bush tax cuts expired at the end of this year and we went back to the tax rates of the Clinton years adjusted for inflation?
This is a thought experiment, not a prediction or a recommendation.
The Bush tax cuts, passed in 2001 and 2003, are front and center now and will be a hot issue going into the elections this fall. Unless Congress renews them by the end of the year, they'll expire. With the economic recovery looking shaky, expiration is particularly controversial.
Understandably, most of the attention has focused on the highest earners, who are likely to be most affected by whatever happens. But as the debate has gathered pace, I have been wondering what it might mean for everyone else. After all, according to the IRS, just 4% of Americans earn more than $200,000 a year.
Sure, everyone's taxes are different, and the U.S. tax code is so horrendously Byzantine that the moment you say anything you run into a thicket of caveats. But let's run some numbers anyway, taking a very broad brush approach. Let's assume you're a typical filer who takes the standard deduction, then look at just the biggest tax issues.
Right now, people pay income taxes on a sliding scale from 10% up to 35%. The 2000 rates started at 15% and went up to 39.6%.
A small bump for those in the middle
For most people, these higher rates are moot. They apply only to the highest of fliers. Fewer than 1% currently pay the 35% rate and fewer than 4% even pay 33%, says the IRS. As for the old 39.6% rate: Adjusted for inflation, you'd pay that now only on any income above $363,000 a year.Most ordinary people these days are paying a marginal rate of 15% or 25%. If we let the tax cuts expire, that might rise for many to 28%. Based on data supplied by the AICPA, these ordinary folks would take a tax bump of anywhere from a few hundred to a few thousand dollars.
For a typical single filer with adjusted gross income of around $40,000, it might be about $400 a year. At $80,000, that rises to about $1,600.
How about married couples filing jointly? They'd get hit with both higher tax rates and a lower standard deduction. (It was raised in 2001.) A couple earning $80,000 a year in adjusted gross income might pay about $2,200 extra. A married couple on $160,000 a year? Maybe $5,500 extra.
If they have children, it would be more, as the per-child tax credit would revert from $1,000 to $500. Ouch.
(It's worth noting that income tax rates can be deceptive. While middle earners may be paying a top marginal rate of 15% or 25%, their average tax rate is much lower. After counting deductions and exemptions, says the IRS, the typical middle-income family is actually paying less than 10% of gross income in federal income tax. Taking rates back to 2000 might raise that by a point or two.)
Continued: Where the biggest changes are
