For today's 10-year anniversary of the 2001 tax cuts (EGTRRA), CRFB issued a release this morning calling for any extensions of the 2001/2003/2010 tax cuts to be fully paid for. The 2001 tax cuts, along with the expansions and extensions in 2003 and 2010, will have cost the Treasury well over $2 trillion by 2012 when they are scheduled to expire.
Simply paying for any extensions in the tax cuts, whether through spending cuts or revenue increases elsewhere in the budget, could almost stabilize the debt this decade - which would be a great start on getting control of our longer-term challenges. Without patching the AMT the tax cuts would cost roughly $2.4 trillion over the next ten years, and nearly $3.2 trillion including interactions with the AMT. As you can see, the tax cuts are quite costly. Lawmakers should not extend them unless they're paid for.
In this blog we wanted to go a bit further than we did in our earlier release, and show you the costs of the main pieces of the tax cuts both with and without the interaction effects with Alternative Minimum Tax (AMT) patches.
|Numbers in Billions|
|Extend Tax Cuts on Income Below $200,000/$250,000||$1,285||$2,085|
Extend Ordinary Income Rate Reductions
Extend Child Tax Credit Expansion
Extend Preferential Capital Gains and Dividends Rates
Extend Marriage Penalty Relief
|Extend Tax Cuts On Income Above $200,00/$250,000||$710||$790|
|Extend Estate Tax at 2011 Levels||$365||$345*|
|Costs of Tax Cuts||$2,360||$3,215|
|Total Costs of Tax Cuts (Including AMT and Interest)||$4,705||$4,705|
Note: Numbers combine extensions supported by President Obama and House Republicans. All numbers rounded to the nearest $5 billion.
The AMT was enacted in the late 1960s, well before the Bush tax cuts were passed. The AMT was designed to ensure that high-income earners who qualified for many tax deductions, credits, and exclusions paid at least a minimum amount of taxes. . However, the AMT was not indexed to inflation. In addition it was not adjusted to take into account the 2001/2003 tax cuts, which pushed tax burdens low enough to subject more people to the AMT. To account for the lack of indexing and the failure to adjust the AMT in 2001, lawmakers indexed the AMT thresholds to inflation to help prevent more people becoming subject to the tax. Since then, Congress has repeatedly enacted AMT "patches" to prevent millions of Americans from facing higher taxes.
Making these patches permanent would cost about $700 billion over the next 10 years--however, the interaction with all the tax cuts would more than double those costs. If you attribute the interaction to the tax cuts, their cost increases from $2.4 trillion to $3.2 trillion, and the middle-income tax cuts increase from $1.3 trillion to $2.1 trillion (excluding the estate tax).
In our release we call on policymakers to fully pay for any extensions in the tax cuts, including making the tax code simpler, more efficient, and fairer. In addition, they should consider fixing this AMT problem once and for all.