Congress recently passed the fiscal year (FY) 2010 budget
resolution, which sets broad guidelines for specific policies that
it will formulate in the coming months. The resolution includes
several provisions that will significantly raise taxes and hurt
These provisions include:
- Allowing the 2001 and 2003 tax cuts to expire for couples
making over $250,000 and singles earning over $200,000. This
includes increases of rates on income, capital gains, and
- Extending the Alternative Minimum Tax (AMT) patch, but for only
- Making permanent the death tax at its 2009 level.
- Eliminating the Making Work Pay Credit after 2010.
Each of these provisions is a substantial tax increase that
would hurt the economy in good times but will devastate it in its
current weakened state. Congress should reject these provisions and
instead pursue pro-growth policies that will help the sputtering
Make 2001 and 2003 Tax Cuts Permanent
for All Taxpayers
The budget resolution calls for extending the 2001 and 2003 tax
cuts for taxpayers earning under $250,000 if they are married and
$200,000 if single. Congressional Democrats claim this is a tax cut
since under current law the tax cuts expire. But simply preventing
a massive tax hike is not a tax cut.
The resolution also calls for the repeal of the tax cuts for
upper-income earners. The top income tax rates are currently 33 and
35 percent for married filers earning over $208,850 and $372,950,
respectively. For singles, the same rates apply to incomes over
$171,550 and $372,950, respectively.
If the policies in the budget resolution become law, these rates
will rise to their pre-2001 levels. The 33 percent rate will
increase to 36 percent and the 35 percent rate to 39.6 percent. The
brackets will likely be set so the 36 percent rate kicks in at
$250,000 for couples and $200,000 for singles. The 39.6 percent
rate will likely kick in slightly above $372,950 after accounting
According to President Obama's own budget, raising these rates
will take $339 billion out of the pockets of upper-income taxpayers
and many small businesses over the next 10 years. Taxpayers could save
or invest this money to fuel economic recovery, but instead
Congress will take it and undoubtedly use it in a less productive
The budget resolution also increases the tax rates on dividends
and capital gains from 15 to 20 percent for taxpayers earning more
than $250,000. These tax hikes would raise the cost of capital and
reduce investment, further hampering economic recovery.
America is currently in the midst of a terrible economic crisis.
This is not the time to raise taxes on anyone. Higher taxes on
small businesses and higher taxes on investment capital are
policies that would weaken the economy under any circumstances.
Congress should instead extend the 2001 and 2003 tax cuts for all
Extend AMT Patch Permanently
The AMT's exemption level is not indexed for inflation, so each
year it threatens to raise taxes on millions of middle-income
earners. Congress passes a one-year patch every year to prevent
this, but so far it has resisted making it permanent.
The budget resolution extends the patch for three years to stop
the yearly exercise--for now. After 2012, the patch expires and
Congress will again have to pass it annually; otherwise taxes will
increase for millions of taxpayers, including millions of
Congress should stop this budgeting charade and finally make the
patch permanent. Once they finally make the patch permanent, they
should start work to abolish the AMT altogether.
Kill the Death Tax
Under current law, the death tax expires in 2010 but comes back
to life in 2011. If the budget resolution becomes law, Congress
would permanently extend the death tax at its 2009 levels. This
includes an exemption of $7 million for couples--$3.5 million for
singles--and a 45 percent rate.
The death tax is a drag on productivity because it discourages
saving and investing and undermines job creation and wage growth. These
activities should never be discouraged, especially during an
economic crisis. Congress should repeal the death tax once and for
all instead of extending it at 2009 levels.
Substitute Tax Rate Cuts for Making
Work Pay Credit
The Making Work Pay Credit is a refundable $400 credit for
singles, $800 for couples, passed as part of the stimulus
legislation. It applies only against earned income, so taxpayers
who receive their income from investments and Social Security--such
as retirees--cannot claim it.
Although a centerpiece of President Obama's campaign, Congress
chose not to extend the credit past 2010, when it is due to expire.
This provides an excellent opportunity to substitute pro-growth tax
policies that would lower tax rates and encourage economic
The credit does nothing to promote economic expansion because it
does not lower tax rates to encourage working, saving, or
investing. Congress should allow the credit to expire,
replacing it with a reduction in all income tax rates. This would
boost the economy by increasing the incentives for investing in
More Trouble Ahead
The tax policies included in the budget resolution are a
harbinger of higher and more economically damaging taxes to come.
The budget resolution increases taxes $1,500 billion over the next
But this is likely not the end of tax hikes: The deficits
projected in President Obama's Budget Blueprint, and adopted by the
budget resolution, average just shy of $1,000 billion each year
over the next 10 years. And this does not include the revenue
shortfalls in Social Security, Medicare, and Medicaid that will
occur in the next few years and further increase these massive
Congress will inevitably raise taxes on all Americans--not just
the top 5 percent of income earners--to try to reduce these growing
deficits. These tax hikes will discourage economic activity and put
a damper on economic growth once the U.S. economy recovers from
this severe recession.
As the economy continues to falter, pro-growth tax policy is
more important than ever. The tax policy provisions in the budget
resolution do not promote economic growth but instead discourage
The most effective way to spur economic recovery is to increase
incentives that drive economic recovery. To do so, Congress should
abandon the policies in the budget resolution and reduce tax rates
on work, saving, investment, risk taking, and entrepreneurial
Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage