the idea that tax cuts for the middle class and poorer also help the rich.
This is a point that has gotten somewhat overlooked in the debate about the Bush tax cuts,
which are scheduled to expire at the end of this year.
President Obama has proposed that the tax cuts for the very wealthiest Americans expire as planned,
but that the tax cuts for all other American households be extended.
One interesting quirk of the US tax system, however, means that the
tax cuts for the “middle class” also benefit Americans who are much richer than “middle class.”
In fact, these “middle class” tax cuts benefit richer Americans more than they benefit middle-class Americans.
Here’s a chart, from the Center on Budget and Policy Priorities,
showing the average tax savings for each income group that comes from the Obama administration’s tax proposal,
rather than letting the tax cuts expire in their entirety:
The tax savings outlined here are a comparison between a world without any Bush tax cuts
and a world with the scaled-back version the Obama administration has proposed.
The center’s Chuck Marr explains:
The income tax operates as a staircase, not an elevator,
so people who make $1 million a year don’t go directly to the top “floor”
(i.e., to the top marginal tax rate, currently 35 percent)
but instead take the “stairs,”
paying tax on the first increment of taxable income at the bottom rate of 10 percent,
paying tax on the next increment at 15 percent,
and so on until reaching the top rate.
As a result, the 2001 tax law’s reductions in the lower tax brackets
benefit not only middle-income people whose incomes fall into those lower brackets,
but also people in the very highest brackets.
In fact, a family making more than $1 million will receive
more than five times the tax cut benefit, in dollar terms,
as a middle-class family making $50,000 to $75,000,
if Congress extends the so-called middle-class tax cuts.
Now, of course, if the Bush tax cuts were extended in their entirety,
the wealthiest Americans would save even more in taxes, according to this item in the New York Times.
And if you are comparing the tax system under President Obama’s proposal to the system currently in place,
the wealthiest Americans will indeed be getting a tax increase next year.
But we'll see how far Obama's proposal actually gets in Congress.
We're guessing, not too far - and he won't do much about it.