The Bush tax cuts began in 2001 and implemented several tax reductions through “sunset provisions,” which are parts of laws that expire on a certain date if legislative actions do not extend the provisions. The sunset provisions of the Bush tax cuts are scheduled to expire on December 31st – leading to the current national debate about whether or not to let the cuts sunset. Although there are many tax cuts set to expire at the end of the year, such as breaks on dividend income, capital gains, and special cuts for married couples, the most important sunset provisions of the Bush tax cuts concern the tax rates of the federal income tax for individuals.
Beginning in 2001, the tax rates of individual income taxes gradually declined until 2003, according to the Tax Policy Center [.pdf]. Individual income tax rates have not changed since 2003. The tax rate for the highest tax bracket, which are couples or individuals making $372,951 or more, fell from 39.6% to 35%. The next three brackets, 36%, 31%, and 28%, each declined 3%. The fifth bracket was unchanged at 15%, but the law created a sixth bracket at 10% that was carved out of the 15% bracket. The chart below shows the income amount for each bracket.
Each of these tax rates will return to the pre-2001 level on January 1st, unless Congress passes legislation to do otherwise. Allowing the Bush tax cuts to sunset would eliminate the 10% bracket, the second, third, and fourth brackets would each increase 3%, and the top bracket would go up 4.6%. In other words, the new year would bring tax hikes for a majority of the country.
Many argue this is poor timing for a tax hike, particularly for Americans in the bottom tax brackets. A tax hike would exacerbate the already worrisome trends within the US economy, such as the declining unemployment rate or the declining value of homes. However, others argue the growing federal deficit is such a large problem that the Bush tax cuts should sunset for the highest bracket only, thereby extending the Bush tax cuts for the five other brackets.
Though, letting the Bush tax cuts expire for the highest bracket only does not have as much support in the Senate as extension of the Bush tax cuts for all the brackets. Democrats have expressed support for raising the tax rate on the highest bracket only, including the President, whereas Republicans generally favor an extension of the Bush tax cuts for each bracket.
On December 2nd, after approval of the House, the Senate failed to pass a bill [.pdf] to let the Bush tax cuts expire for the highest tax bracket only. There were 53 votes in favor of the bill – 7 short of the 60 required votes. No Republican Senators approved the bill. Facing this shortfall, President Obama announced a compromise on December 6th that he favored the expiration of the Bush tax cuts for the highest bracket only, but that he would also rather extend the Bush tax cuts for the highest bracket instead of allowing the cuts to expire for each bracket, especially the lowest brackets. Further, the compromise also included an extension of emergency unemployment benefits, which are also set to expire at the end of the year.
Even though President Obama made this announcement with the expectation of passing a bill, no such bill has been passed to this date. Ironically, congressional Democrats have blocked such a bill from even reaching a vote on the House or Senate floor. Though, with Congress tentatively scheduled to adjourn December 17th, as well as the fact that Republicans will control the House after the recess, approval of a compromise is likely in the next week.