Bush Tax Cuts Expiring – How This is Likely to Play Out

by Darwin on August 3, 2010

With the Bush Tax Cuts set to expire at the end of this year if no action is taken, it’s going to be the political issue of the year going into mid-terms, likely pitting tax-cutters vs. tax-the-wealthy only camps against each other.  While it may seem like a binary event, the way this will play out may actually be much more complex and politically nuanced than you might expect.

Bush Tax Cut Expiration Explained

First, let’s understand what’s at stake here.  In a nutshell, the White House has projected that they will plan on holding rates steady for families making less than $250K per year and allow the old tax rates to increase back to the prior levels for those over that threshold.  For a look at how your taxes will look under the administrations, check out the Obama Tax Plan Calculator post.

Currently, there are several brackets, so this mythical $250K level would need to be instated as one of the thresholds for a new rate.  Here’s the most recent rate schedule:

(click to enlarge)

A Game of Chicken

While the Whitehouse has already projected their intent on letting the cuts expire for the most wealthy Americans (the “most fortunate” actually as quoted by Geitner), that does require them to actually PASS NEW LEGISLATION to even make that happen.  Now, with the typical block of 41 or so senators voting against like we’ve seen with virtually all of Obama’s non-partisan legislation this year, there will likely not be the 60 votes needed for it to pass.  This assumes Republicans will block legislation to cut taxes for middle and lower income Americans which could come at a political toll.  As outrageous as this may sound, and as much ammo as the Democrats can garner from this for future election slogans, this will likely be the case.  Why?  Because raising taxes on small business (who actually create useful jobs as opposed to the federal government jobs being created now) and high income individuals who tend to spend a lot of money on things that do stimulate the economy doesn’t make sense right now – we’re in the midst of a very fragile economic recovery and unemployment is unlikely to break below 8% for years to come.  By raising taxes now, it’s going to be a tough argument for Dems that this is actually “helpful” for the recovery.  If anything, yes, it will cater to mainstreet and punish the rich more which has been the party line, but most people looking at the economics would agree, it certainly isn’t going to spur job creation by any means, it will simply surpress it.

Next, after initially voting down the legislation to ONLY preserve the lower and middle income tax rates, there will likely be some sort of compromise whereby even the higher brackets get some sort of dispensation.  Perhaps income limits change or perhaps the tax rates don’t go all the way back to the pre-Bush Tax Cut levels and high income earners only see a modest rise as opposed to a reset all the way back to prior levels.

It’s uncertain what will happen but I’d be willing to bet that it won’t go the way the White House is projecting at the moment – which is to simply hold rates steady at the lower tiers and raise them all the way back up at the top levels.

What’s Your Guess on Taxes for 2011?

{ 3 comments… read them below or add one }

Financial Samurai August 3, 2010 at 12:16 am

What do you think will be your effective tax rate increase?

Also, I think there’s a growing chance the extension occurs for one more year. Makes sense in this nascent recovery!


Darwin August 3, 2010 at 12:21 am

I suspect lower brackets will keep the current rate and top brackets will increase, but perhaps not all the way back. Or perhaps there will be a side negotiation on capital gains/dividend income or something else to appease Republican senators. Not sure, but I doubt it will be open/shut with no negotiations.


Roger Wohlner November 3, 2010 at 8:42 pm

I have no clue as to what Congress may or may not do, but whatever it is I hope they do it soon. Depending upon what is passed and when it could create some financial planning opportunities or nightmares. My hope is that investors will not get too caught up in the hype and speculation in the financial media and make moves that might not be in their best long-term interests.


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