The Pending 26% Tax Hike on the Middle Class

In today's "The Gartman Letter" Dennis points out what will happen if the "Bush Tax Cuts" expire:

1. All income tax rates will go higher with the bottom rate moving up from 10% to 15% while the top rate shall go up from 35% to 39.6% (see chart above comparing 1999 and 2008 tax rates).

2. The tax credit for children will drop from $1000/child to $500. 

3. The standard deduction for married couples will be cut. 

4. Capital gains taxes will go up from 15% to 20%.

5. Dividends, which now are taxed at a lower rate than earned income will rise to that same level. 

6. The one year “exemption” in estate taxes ends but with a $1 million exemption, and the tax rate goes to 55%.

The chart below is from The Tax Foundation and compares annual individual income taxes paid before and after the "Bush tax cuts" by various income groups:

Despite all of the political rhetoric about "tax cuts for the rich," this analysis shows that federal income taxes have fallen for groups at all income levels as a result of the Bush tax cuts, compared to the 1999 tax rates under Clinton.  And therefore, taxes for all groups would go up if the current tax rates expire at the end of the year (see percentage increases in taxes for each group above). 

And in fact, the group in the chart above that would experience the largest percentage increase in taxes would be the married taxpayers with $50,000 of household income (clearly middle class by most definitions) - they would pay 26.7% more in taxes if the Bush tax rates expire. By contrast, "rich" single taxpayers with income of $125,000 would pay only 10% more in taxes. In other words, some middle-class taxpayers received twice the tax cut on a percentage basis as some of "the rich" under the Bush tax rates, and that group would suffer the most with higher taxes if the current federal income tax rates expire.