An opinion by Patricia L Johnson
New legislation will be required in order to extend the tax cuts put into place by President G.W. Bush in 2001 [PL 107-16], otherwise they will expire at midnight on December 31, 2010.
Recently Mitch McConnell, the highest ranking Republican Senator spoke out on the subject and gave the impression it is apparently the view of the Republican Party that there is no evidence tax cuts reduce U.S. revenues.
Senator Mitch McConnell – Republican, KY
“There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.”
With all due respect to Senator McConnell, I have to disagree. The only way to determine whether or not tax cuts diminish revenues is to know what the revenues would have been without the tax cuts. Since PL 107-16 is major legislation covering numerous areas of taxes, it would be virtually impossible to state what the revenues would have been without the tax cuts.
What we do know, for a fact, is Individual Income Taxes, as a percentage of GDP, peaked in 2001 at 9.7% and declined to 6.9% of GDP in 2004.
PL 107-16 added a new bracket to the tax code, and changed both the tax rate schedule, and the taxable income amount over a period of years. We began FY2001 with a low tax rate of 15% for earnings up to $43,850.00 and a high tax rate of 39.6% for anyone earning over $288,350.00, per the following:
Tax rates for Married filing Jointly before PL 107-16
By FY2008 the 15% tax rate applied to earnings up to $65,100.00, the high rate was decreased by 4.6% to 35.0%, while also increasing maximum earnings by $69,550.00 to $357,700.00. In other words, revenues were hit with a double whammy on Individual Taxes just on the tax rates. [Tax rates listed are for married persons filing a joint return]
Tax rates for Married filing Jointly in 2008
PL 107-16 was promoted as a tax cut bill for all Americans, but very often it will be referred to as tax cuts for the rich. The reason for the label is due to the extraordinary changes included in this legislation.
The list of changes is simply too long to include, but you can review PL 107-16 at the following link http://www.irs.gov/pub/irs-utl/egtrra_law.pdf
Several of the tax changes that you don’t hear much about are the Unified Credit (Applicable Exclusion Amount) , Gift Tax, Estate Tax, General Skipping Transfer Tax and Income Tax on an Estate. http://www.irs.gov/publications/p950/ar02.html#en_US_publink100099475
Following is a description, from the IRS, of just one of the above – the Unified Credit:
“Unified Credit (Applicable Exclusion Amount)
A credit is an amount that reduces or eliminates tax. A unified credit applies to both the gift tax and the estate tax. You must subtract the unified credit from any gift tax that you owe. Any unified credit you use against your gift tax in 1 year reduces the amount of credit that you can use against your gift tax in a later year. The total amount used during life against your gift tax reduces the credit available to use against your estate tax.
The unified credit against taxable gifts remains at $345,800 (exempting $1 million from tax) through 2009, while the unified credit against estate tax increases during the same period”.
While the unified credit for gift tax stays at $345,000.00, with a million dollar exclusion, from 2002 through 2009, for estate tax purposes it increases from $345,000.00 in 2002 to $1,455,000.00 in 2009. During the same period the estate tax exclusion increases from $1,000,000.00 in 2002 to $3,500,000.00 in 2009 and is eliminated completely in 2010.
In addition tax rates for estate tax were decreased from 50% in 2002 to 45% in 2009. Since the estate tax is eliminated in 2010 the tax rate drops to zero, while the gift tax rate drops 15% from 50% in 2002, to the top income tax rate in 2010, currently 35%.
What does all that mean?
It means the U.S. Treasury will lose billions of dollars in revenues. The rate decreases for estate and gift taxes were gradual over a number of years so it took several years for the estate exclusion to double from 2002 to 2008; therefore the decreases in estate and gift tax revenues could easily be attributed to any number of reasons. In 2009 however, the exclusion amount tripled and the result is a dramatic decrease in the amount of revenues received in this tax category.
In 2008 revenues from Estate and Gift Taxes were $28.8 billion and decreased 18.4% in 2009 to $23.5 billion. Can this country really afford reduced revenues – absolutely not!
The reason you don’t hear much about these goodies is because they don’t apply to you, “the small people”, the average Jane/Joe, however they do apply to those that want the tax laws extended.
While you are doing everything humanely possible to keep food on the table for your family, many of the legislators are laughing all the way to the bank.
It’s not easy to comprehend the magnitude of the estate tax change unless you think about death – something most of us don’t care to think about. But, here’s the bottom line, if former President George H.W. Bush had passed away in 2009 his beneficiaries would be paying a ton of money in estate taxes. Since 2010 is here and he’s still alive (thank goodness), when he does pass away his beneficiaries will not have to pay anything in estate tax, zip, zero, nada. While that’s bound to make all the Bush’s happy, it doesn’t do much for the U.S. Treasury, or you the average taxpayer.
On the other hand, since Senator Ted Kennedy passed away prior to 2010 his beneficiaries had to pay an incredible amount in estate taxes.
Not all the rich are enjoying their tax windfall. Warren Buffett, who was worth an estimated $52 billion at the time, spoke at a New York fundraiser in 2007 and said he was taxed at a rate of 17.7% on the $46 million he earned last year, while his secretary was taxed at 30% on the $60,000.00 she earned http://www.timesonline.co.uk/tol/money/tax/article1996735.ece
Mr. Buffett wasn’t attempting to pay less than his fair share of taxes; the problem is our tax system is geared towards providing those with high incomes lower taxes through very generous deductions and exemptions.
For those of you who do not understand the difference between Gross Income and AGI [Adjusted Gross Income] AGI is a person’s gross income, less deductions. Let’s go back to the top Federal Individual Tax rate of 35% that applies to a person earning more than $357,700.00,
When we start out with $357,700.00 as our gross income, we can take all our allowed deductions and exemptions against that amount. If we have $100,000.00 in deductions, then our Adjusted Gross Income becomes $257,700.00 and our tax rate becomes 28% rather than 35%. The more deductions we have, the lower our tax rate becomes.
The fact this law was touted as a tax cut for the poor and middle class is truly a slap in the face to all poor and middle class Americans. While crumbs were tossed to the poor and middle class, major tax exemptions were awarded to the wealthiest people in this country.
What percentage of taxes did you pay last year? Was your rate higher than the 17.7% Warren Buffett paid on his $46 million in earnings?
The word ‘repeal’ has been used often in past months when referring to various programs put in place by the Democrats. Repeal is a word that should very definitely be considered when reviewing the extraordinary deductions and exemptions provided to the wealthy in PL 107-16.
Patricia L Johnson is a former special assignment writer/photographer.