Select Tax Cut Extensions

Most of the individual income tax cuts enacted from 2001 through 2006 will sunset in 2011. The President would like to make the cuts permanent, but doing so would cost roughly $1.7 trillion over the ten-year budget window and much more beyond.¹ In addition, policymakers of both parties recognize that the alternative minimum tax (AMT) is not viable, at least in its current form, but repeal would reduce tax revenues by $920 billion over the 2007-2017 period if the tax cuts are not extended and over $1.7 trillion if the tax cuts become permanent. Rather than make the tax cuts permanent and repealing the AMT, some policymakers have proposed extending only the lower- and middle-income tax cuts, repealing the AMT, and scaling back, but not eliminating the estate tax.

We analyzed three tax changes:

1. Individual Income Tax

• Tax Brackets: make the 10-percent tax bracket permanent and retain the current 25 percent bracket rather than allow it to revert to 28 percent (the 28, 33, and 35 percent brackets return to 31, 36, and 39.6 percent, respectively)

• Child Tax Credit (CTC): maintain the current $1,000 along with its current partial refundability

• Child and Dependent Care Credit: retain current parameters: maximum credit rate of 35 percent; $3,000 (indexed after 2005) maximum per-child expense subject to credit; threshold for credit rate reduction of $15,000 (indexed after 2005); minimum credit rate of 20 percent

• Marriage Penalty Relief: leave the standard deduction and width of the 15 percent tax bracket for married couples filing jointly equal to twice those for single filers and retain the increased Earned Income Tax Credit (EITC) plateau range for joint filers

• Allow EITC and CTC against the AMT and use adjusted gross income (AGI) rather than modified AGI in the EITC phase-out calculation

2. Alternative Minimum Tax: Eliminate the alternative minimum tax entirely

3. Estate and Gift Tax. Set tax parameters at levels currently scheduled for 2009

• Effective exemption of $3.5 million per decedent

• Maximum tax rate of 45 percent

• Deduction for state death taxes paid rather than a credit

• No 5 percent surtax to reclaim the value of the exemption

Extending the selected provisions of the individual income tax beyond 2010 would reduce federal revenues by about $700 billion over the 2007-2017 period (see Table T07-0070). Nearly one-third of the tax reduction in 2011 would go to tax units with income below $50,000 and somewhat over a third would go to those with incomes between $50,000 and $100,000 (see Table T07-0071). The average tax unit with income between $20,000 and $50,000 would see their after-tax income rise on average by just under 2 percent. In contrast, tax units with income above $200,000 would have after-tax income gains of less than 0.5 percent. Table T07-0072 shows the effects of extending the tax cuts by income percentiles.

Repealing the AMT in addition to extending the tax cuts described above would raise the 11-year revenue loss to $2.1 trillion (see Table T07-0070). Nearly two-thirds of the total 2011 tax reduction would go to tax units with income between $50,000 and $200,000 with the remainder split roughly equally between tax units with incomes above and below that range (see Table T07-0073). Tax savings from repealing the AMT would accrue primarily to tax units with income between $75,000 and $500,000, but among those tax units, after-tax income would rise by roughly 2 percent for those with income between $100,000 and $500,000 compared with about 1 percent for other tax units. The effects are shown by income percentiles in Table T07-0074.

Freezing the estate tax at 2009 levels as well as making the middle-class tax cuts permanent would increase the 2007-2017 revenue loss by about $160 billion to a total of $2.26 trillion (see Table T07-0070).² The bulk of additional tax savings in 2010 from changes in the estate tax would go to tax units with income above $100,000 (see Table T07-0075). The effects are shown by income percentiles in Table T07-0076.

1. Estimates are static and do not account for any potential microeconomic behavioral response. Official estimates from the Joint Committee on Taxation would likely show a somewhat different revenue impact.

2. Estimates for estate tax provisions do not include any impact on the gift tax or individual income tax.