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2006 round of tax cuts aimed at affluent Americans
McClatchy Newspapers


January 03, 2006
Tuesday PM

WASHINGTON - More than four years after Congress passed President Bush's centerpiece tax-cut legislation, economists are still arguing over who has benefited the most - the poor, the middle class, or America's most affluent.

But there isn't any doubt about who will be smiling most from the 2006 round of tax cutting: It's the rich, and they're about to get richer.

Starting Jan. 1, two new pieces of Bush's original 2001 tax cut will kick in, both overwhelmingly aimed at households well into six figures of income. One provision would ease restrictions on high wage-earners' ability to fully itemize their tax deductions; the other would relax limits on the value of personal exemptions.

2006 tax cuts at a glance
McClatchy Newspapers

The Internal Revenue Service has some good news on the tax front in 2006 - at least for households in the top 5 percent of income in the country. Here's a look at two new tax cuts taking effect Jan. 1:

PERSONAL EXEMPTIONS: In 1990, President Bush's father signed legislation that limited the value of personal exemptions of high earners as part of a deficit reduction package. Now begins the process of reversing that action and restoring the full benefit.

Current law phases out the personal exemption benefit (now $3,200 per person) for singles making $145,950 and couples making $218,950. The loss amounts to 2 percent of the personal exemption for every $2,500 in income above the income guidelines. The penalty is to be removed in stages: one-third this year; one-third in 2008; one-third in 2010.

ITEMIZED DEDUCTIONS: The 1990 legislation applied the same limitation to the value of itemized deductions with a couple of twists.

Current law phases out the benefit of itemized deductions at $145,950 for both singles and couples. The penalty is equal to 3 percent of the amount by which the household income exceeds $145,950, but in this case it cannot exceed 80 percent of itemized deductions. In this case also the legislation is gradually put into effect, fully restoring the benefit by 2010.

(Distributed to subscribers by Scripps Howard News Service.)

Together, they're expected to reduce federal income taxes by $27 billion over five years, with 97 percent of the benefits falling to those making at least $200,000 a year.

A month after these provisions take effect, Congress is expected to resume another round of tax-cutting, and here again it's the most affluent who will be the biggest recipients. Although the precise outcome of Congress' new tax-cut plan remains in doubt, it appears Americans with large dividends and capital gains, along with households paying the Alternative Minimum Tax, will be the winners.

Before adjourning in late December, the House gave initial approval to $94.5 billion worth of tax cuts over five years, and roughly 90 percent of them were aimed at high earners.

Some critics say the combination of tax-cut provisions forms an odd juxtaposition with Congress' simultaneous bid to cut $40 billion in federal spending over the next decade, much of it aimed at entitlement programs benefiting the poor.

Robert Greenstein, director of the liberal Center on Budget and Policy Priorities, said the new tax cuts have a "kind of gilded-age feel. ... There's a pretty stark contrast between some of the provisions in the budget bill ... and these two new tax cuts."

Greenstein said affluent Americans already have fared well in the early rounds of Bush's tax cuts, citing studies that suggest an upper-income tilt to the president's signature economic program. An analysis by William Gale and Peter Orszag of the Brookings Institution said the Bush cuts had increased disparities between rich and poor in after-tax income.

"These tax cuts are skewed pretty heavily in favor of people at the top," said Greenstein.

Others, employing different economic measurements, argue that the Bush tax cuts have been in roughly proportion to the federal income taxes Americans are already paying.

"The tax burden among income groups has been relatively unchanged," said Dan Mitchell, a tax expert at the Heritage Foundation. "The administration bent over backwards to make sure that was the case."

But there's no argument over the character of the tax cuts taking effect Jan. 1 and those awaiting action by Congress early in 2006. If your household income is $200,000 or more, you'll like this round of tax cuts; if it's in the seven figures, you'll like it even more.

The two tax provisions effective with the new year have an intriguing political footnote. They essentially undo legislation signed by Bush's father, George H.W. Bush, in 1990 as part of a deficit-cutting package.

Each was a variation on the same theme: limiting the benefit of certain tax breaks for high-income earners. The higher the income, the larger the limitation - at least to a point.

One of the provisions phases out benefits of the personal exemption (now $3,200 per family member) for high earners. The phase-out begins with income of $145,950 for singles and $218,950 for married couples, and works its way toward total elimination of the benefit.

The other limitation is on itemized deductions, and in this case the phase-out begins at $145,950 for both singles and couples, and deductions cannot be cut back by more than 80 percent.

The Bush tax cut removes these limitations in chunks - one-third now, another third in 2008 and the final third in 2010.

According to the Urban-Brookings Tax Policy Center, 53.5 percent of the benefits will go to households with incomes over $1 million; another 43.2 percent will go to those making $200,000 to $1 million; and the remaining chunk, 3.3 percent, will go to those making $100,000 to $200,000.

Similarly, the congressional proposal to extend lower rates on capital gains and dividends also would have its biggest impact on the affluent. An estimated 53 percent of the benefit would go to those making $1.3 million, according to Citizens for Tax Justice, with three-fourths of Americans receiving nothing.

Left-leaning groups such as the Citizens for Tax Justice say the proposal appears jarring at a time when Congress is curtailing programs such as heating fuel assistance, Medicaid and college loans.

"It's hard to believe that Congress could see more tax cuts for the rich as a priority," said Robert McIntyre, CTJ's director.

The Heritage Foundation's Mitchell and other proponents counter that tax cuts have been an important factor in the nation's robust economic growth of the last couple of years, and that tax cuts inevitably have a large impact on the affluent because they pay the overwhelming share of income taxes.

"It's no coincidence at all that we've had strong economic growth after the tax cuts," Mitchell said.


Distributed to subscribers by Scripps Howard News Service.

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