Tax Breaks for the Wealthy


On January 1 Congress allowed two tax breaks that benefit the wealthy to become effective. The cuts eliminated current provisions of the tax code that limits the amount of personal exemptions and itemized deductions that Americans with high incomes can take. Over the course of the next five years the tax cuts will cost approximately $27 billion, according to a study by the Center on Budget and Policy Priorities. Ironically, Republicans in Congress, only two weeks before the cuts took effect, voted to reduce domestic spending on programs affecting the poor and the middle class by $39 billion over the next five years.

The tax codes eliminated are the Pease provision and the personal exemption phase-out provision (PEP). Both were originally passed in 1990 in an effort to reduce the deficit. The Pease provision limited the amount of itemized deductions taxpayers with high incomes could claim. The tax code permits individuals to reduce their taxable income either by the standard deduction or by an amount equivalent to their total itemized deductions. In general, wealthy taxpayers use itemized deductions much more than the middle class and the poor.

The Pease provision reduced the amount of deductions for those who itemized and had incomes exceeding $145,950 last year. The total amount of itemized deductions wealthy taxpayers could claim was reduced by three percent of the amount by which their incomes exceeded $145,950. Similarly, the PEP provision of the tax code phased out personal exemptions for the wealthy. The tax code permits individuals to claim a personal exemption for each member of their household; last year it was $3,200.00.

They can subtract personal exemptions from their adjusted gross income before calculating their taxes, thereby reducing the amount of taxes owed. In 2005 the PEP provision mandated that taxpayers lost two percent of their personal exemption for every $2,500.00 by which their income exceeded $218,950 for married couples and $145,950 for singles.

Congressional Republicans have frequently said that the Pease and PEP provisions made it more difficult for Americans to determine their taxes. However, it’s typically high-income taxpayers who take itemized deductions. And these are individuals who usually have their taxes prepared by accountants and other tax professionals who can easily calculate these provisions.

The Joint Committee on Taxation has estimated that over the next 13 years these tax breaks for the wealthy will deprive the country of $197 billion in revenue. And a study by the Brookings Institution determined that 97 percent of the Pease and PEP tax breaks will go to those households with incomes above $200,000. And more than half of these breaks will benefit the 0.2 percent of families with annual incomes exceeding $1 million. Once these tax cuts are fully implemented in 2010, the average millionaire will save $19,000 annually in taxes.

Only three percent of families with annual incomes of less than $200,000 will receive any benefit from these tax breaks. Families with yearly incomes between $100,000 and $200,000 will receive an average tax cut of only $25. And families earning less than $100,000 – the vast majority of Americans – will not benefit at all.

Shortly before these tax cuts became effective Republicans in Congress approved of massive and draconian domestic budget cuts, despite objections by Democrats. Republicans insisted that “tough choices” had to be made in an effort to reduce the growing deficit. Consequently, they voted to cut $11 billion over the next five years from Medicaid, the health care system that serves America’s poor. Substantial reductions were also made in childcare assistance, which will result in 255,000 fewer children living in poverty receiving federal assistance.

Republicans voted to cut funding for child support enforcement programs by $1.5 billion over the next five years. These funds are used to locate parents who have failed to pay child support and collect delinquent payments on their child’s behalf. According to the Congressional Budget Office, this loss of federal funding will result in $2.9 billion in child support going uncollected in the next five years.

Other cuts were equally severe. Congressional Republicans agreed to cut $343 million in funding for foster care programs, including reductions that will make it more difficult for grandparents who are raising their grandchildren to receive assistance. Over $12 billion was cut from federal college loan programs, making it more difficult for poor and middle-class Americans to afford a college education.

If Republicans had chosen not to allow the Pease and PEP tax cuts to take effect this would have saved more than two-thirds of the funding cut from domestic programs. In fact, over the next five years these tax breaks exceed the savings from all of the reductions in low-income assistance programs that Congress voted to cut. It appears that for Congressional Republicans, “tough choices” in reducing the deficit didn’t include requiring the wealthy to continue to pay their fair share of taxes.

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