Expiration Of The Bush Tax Cuts

My brother-in-law (BIL) and I (MPV) discuss the expiration of the Bush tax cuts:

BIL: The "evil Bush" tax cuts benefited everyone.

MPV: The Bush tax cuts were primarily responsible for the explosion of the deficit after Clinton left office. Their expiration may permit the deficit to be tamed once again, and without much Congressional input on the question. And this is such a bad thing?

BIL: During Bush's term revenues at the IRS were at record levels. This is because tax cuts stimulated economic activity. More people were paying taxes but at lower tax rates. Result was higher tax receipts at Treasury. Did you go to the link that was emailed? Your tax rates will go up. Will this curtail your economic activity? Probably if you are on a budget. BTW, you can voluntarily send more to the IRS than you owe. Check it out. If you have trouble finding how then just declare additional income from flea market sales, etc.

MPV: I have no desire to send more to the Feds, thanks! Nevertheless, that is an interesting question about the percentage of income the federales take. I never noticed any change over the last twenty years, and I suspect there hasn’t been much change. The numbers in the article I think were bogus. Going back to the pre-Bush tax code will probably have zero effect on my income, and the incomes of most people below $200K/year. But I have my tax records, and I can check. I’ll report back soon….

(later)

MPV: Out of curiosity, I calculated the amount of my income captured by the feds over the last 19 years. I’ve been in this job for 20 years, so there is rough stability jobwise over that period.

During the 1990’s, my federal income tax rate mostly fell, until rising income in the late 90’s likely pushed me into a higher tax bracket. In 1998, I became a homeowner, and eligible for the homeowner deduction (as evident in the graph by the BIG DROP in tax rate in 1998!) I refinanced in 2002 and again in late 2005, taking out more and more money that was also subject to the homeowner deduction (and evident in the graph by drops in tax rate). Thus, I find it hard to spot changes related to change of Administration in 2001, because these external changes swamp everything else.

But if one wants to, one could argue that the drop in rate from 15.0% in 2001 to about 13.3% today is a result of the Bush tax cuts. That’s probably still an exaggeration, but for the sake of argument, let’s go with it. At my current salary, that is worth about $1,200.00/year (about what I spend for one night at the casino). If I lost that due to expiration of the Bush tax cuts, I’d have no serious troubles.

It's pretty easy to show that lower tax rates do not stimulate the economy enough to offset the lower tax haul per person. Say that you have a booming, low tax economy: 5% unemployment (95% employment) at a tax rate of 13.3%. Contrast with it torpid, higher-tax economy: 10% unemployment (90% employment) at a tax rate of 15%. Posit an average annual income of $50,000.00. The average tax haul per person would be:

Low-tax: 0.95 * $50,000 * 0.133 = $6,317.50
High-tax: 0.90 * $50,000 * 0.150 = $6,750.00

So, this just shows the obvious: higher taxation generates higher revenues at the Treasury, even if the economy takes a serious hit in the process. America ain’t Arthur Laffer’s fantasy economic environment! Never was!

As long as people can shelter income from taxation (as they do with the homeowner deduction, and multiple other deductions) tax rates in reality will never reach the levels described in the link you attached. The figures there are scare figures – and completely bogus in the real world.