House Minority Leader Nancy Pelosi, responding to an expected acceleration of John Boehner’s timeline on the Bush tax cuts, fired off a letter to the Speaker asking for immediate consideration of an extension of just the “low end” tax cuts – which include the Bush-era marginal rates for households making up to $1 million. This represents a shift in the dividing line for the Bush tax cuts, which has traditionally been at $250,000.
The Bush tax cuts at every level up to $1 million in annual income, in other words, are now framed as “middle-income tax cuts.” She says it right here in the letter:
Without further delay, the Majority Leadership should schedule a vote on extension of the middle-income tax cuts, as early as next week, to increase certainty for millions of American taxpayers and for the economy. We should not delay passing this legislation that will help afford all Americans the opportunity to reach their goals and realize the promise of the American Dream.
We must ask the very wealthiest Americans to pay their fair share. Democrats believe that tax cuts for those earning over a million dollars a year should expire and that we should use the resulting revenues to pay down the deficit.
First of all, if you make the dividing line at $1 million a year in annual income, there simply won’t be all that many revenues generated to pay down that deficit. When the dividing line was $250,000 a year, the revenue was around $800 billion over a ten-year period. I don’t have a strong grasp of what the numbers would be at $1 million, but my guess would be half that, if not more. So from a deficit reduction standpoint, this makes pretty much no sense.
Second of all, because of our marginal tax rate system, high-income earners at the $1 million
level would still benefit from all the tax cuts on the first $1 million of their income, which are substantial. In fact, you’d be giving hundreds of billions of dollars – whatever the difference is between letting the tax cuts expire at the $250,000 level and the $1 million level – entirely to well-off people.
Over time, this completely constrains progressive governance, at least in the current era where budgetary theory favors so-called fiscal responsibility over the long term. It was already a mistake to keep the Bush tax cuts on the first $250,000 of income and to try and make the dividing line there, as those tax cuts are simply not well-designed, and even the “low-end” tax cuts favor the rich to a larger degree, especially when you mix in the estate tax and other tax issues. Raising that bar to $1 million only exacerbates this.
A millionaire’s bracket, as many have suggested, makes sense in the context of adding it onto the Clinton-era rates. To just return to Clinton-era rates at that level locks in historically low tax rates for a large swath of wealthy people.
Fortunately, John Boehner is so solicitous of millionaires that he will reject this. Which means that the alternate theory, to let all the Bush tax cuts expire and then come back with a new regime to transform the tax code in a progressive way after the fact, is still a possibility, if gridlock ensues as expected.