Yesterday I tried to clear up some of the confusion surrounding the fight in Congress over extending the Bush tax cuts. But in the process of trying to explain how it is that both parties can portray their opponents as raising taxes, I made the common mistake of saying that the fight was over whether or not to extend the Bush tax cuts just on people who make less than $250,000 a year. In fact, however, the fight is over whether or not to extend the tax cuts on all income less than $250,000 a year. Even if Congress decides not to extend the tax cuts on income over $250,000 a year, people who make more than $250,000 a year will still get to keep the cut on the first $250,000 of their income.
I should know better, since I’ve written about this issue before. It matters because what many Democrats want to do—and what the bill passed in the House yesterday would do—is extend the tax cuts on the first $250,000 of everyone’s income, and not simply for people making less than $250,000. As Robert Reich explains, what Obama and the Democrats is proposing is that
EVERYONE gets a continuation of the tax cuts on the first $250,000 of their incomes. If your income is $251,000, you’ll get the Bush tax cut on $250,000 of it. Only $1,000 would be taxed at the higher Clinton rate.
As Reich says, that this is not more widely understood represents a huge communications failure on the part of Obama and the Democrats. It means the Democratic proposal doesn’t pick on the rich the way some say it does. In fact, some people who make more than $250,000 will still benefit on balance from the Democrats’ plan, since the would get to keep the tax cuts on most of their income, and only see taxes go up on the portion of their income over $250,000. One of the main arguments against the Democratic proposal has been that people who make $250,000 a year aren’t really that rich, in spite of making more than almost 99% of Americans and around 5 times as much as the average American. But in fact extending the tax cuts for income over $250,000 won’t have much effect the overall tax rates of people who make a little more than $250,000 a year.
That means the fight is really over tax breaks that really only kick in for people who make closer to $400,000. Nevertheless extending those tax breaks seems to be the Republican Party’s top priority. Even though Republicans have made reducing the deficit the centerpiece of their platform, they are willing to add $700 billion to the deficit over 10 years to extend the tax cuts on income over $250,000. They have even held up ratification of the New START treaty—in spite of the fact that it has been endorsed by five former Republican Secretaries of State—until the high income tax cuts have been extended. And at the same time they have refused to extend unemployment insurance for the 6.2 million Americans who have been out of work for more than 6 months.