What Happens if Congress Extends Tax Cuts for Those Making $500,000?

By :: November 20th, 2012

What would happen if Congress extends the 2001-2010 tax cuts for couples making $500,000 or $1 million-a-year instead of $250,000 or less, as President Obama proposed? According to a new analysis by the Tax Policy Center, Obama could agree to such a deal without adding much more to the deficit than a Senate bill that extends for a year most of the 2001-2010 tax cuts for those making $250,000.

TPC figures that preserving the tax cuts for those making between $200,000 and $500,000 for just one year (2013) would cost Treasury an additional $7 billion over a decade (of course, nearly all of it would come in that first year). Raising the threshold to $1 million would reduce revenues by an extra $14 billion, relative to that Senate bill. If the Senate measure included a one-year extension of the Alternative Minimum Tax patch, raising the threshold to $500,000 would lose just a bit more. The total added cost:  $7.3 billion.

The reality is only about 760,000 households (out of 157 million) make between $500,000 and $1 million. Fewer than 5 million make between $250,000 and $500,000. Even though each of these individual households makes a lot of money and pays a lot of tax, letting them keep their tax cuts of the last decade for one more year isn’t that big a deal.

Keep in mind that the basic Senate bill would slash tax revenues by about $250 billion over 10 years. Adding the AMT fix for 2013 only would reduce revenues by an additional $96 billion for a total cost of about $350 billion. Thus, raising the thresholds to $500,000 or $1 million would further reduce tax revenues.

Still, a number of key congressional Democrats have tossed out the idea of changing the definition of “high income.” So far, the White House has expressed little public interest but the idea remains on the table.

TPC's estimates assume Congress will protects these high-income households from higher taxes for one year only. Thus, the new definition of rich would be used only to get Congress around this year’s fiscal cliff.  Permanently protecting those making $500,000 or $1 million from tax increases would obviously add a lot to the price tag.

Still, playing with the definition of high-income could be part of Washington’s fiscal cliff avoidance strategy. It will at least be worth watching.


  1. Michael Bindner  ::  8:56 am on November 21st, 2012:

    The big money is not in the rate increases, its in dealing with dividend and capital gains rates. I suspect that the promise in the Senate to increase the tax to millionaire level is all about promises to donors or making the GOP argument more extreme. Making tax arguments and hoping the voter notices has not worked out so well.

    I can see higher tax rates for people with million dollar or half million dollar incomes (I even put one in my tax plan). This debate, however, is to lower tax rates on those whose tax rates would go up automatically – a step in the wrong direction. That being said, there should still be an ESOP exemption for this money for people cashing out their companies to their employees. These large payouts largely represent the benefit of selling a business or farm that one has spent years building up. I would propose some kind of exemption for people who sell a business, but I fear more people like Mitt Romney would use it than people like Famous Amos.

  2. Ralph H  ::  4:09 pm on November 21st, 2012:

    It would be only fair to raise the limit or to add additional rates at incomes at or above $1mil. It also would be fair to index in future years.

    The rate structure is presently very “flat” with a top rate at $388K. This is made worse in the case of modern families where each spouse might make roughly $100K and pay SSI on the whole income. You can make a case that dual income professionals actually pay a higher total tax rate (income + SSI + MC) than a wealthier couple earning $375K.

  3. Tax Roundup, 11/26/2012: Is there a good side to tax evasion? Plus more fiscal cliff jumping! « Roth & Company, P.C  ::  9:18 am on November 26th, 2012:

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