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Allow 2001 and 2003 Tax Cuts to Expire at the Highest Incomes

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) extended the 2001 and 2003 tax cuts through 2012, but nearly all of them are now scheduled to expire in 2013. Unless Congress acts, the individual income tax will return to its pre-2001 level (except for a few permanent changes). In defining the baseline for his budget, the president assumes that, rather than ending in 2013, the tax cuts will become permanent for all households. Relative to that baseline, the president would raise taxes on couples with income levels over $250,000 and above $200,000 for single filers (both thresholds in 2009 dollars and indexed for inflation in subsequent years).* Specifically, for those taxpayers, the president would:

  • restore the top two tax rates to their pre-2001 levels of 36 percent and 39.6 percent and create a new tax bracket between the next-to-highest rate and the one immediately below it to prevent a rate increase on income below the thresholds;
  • reinstate the personal exemption phaseout and the limitation on itemized deductions;
  • return the tax rate on long-term capital gains to 20 percent for taxpayers in the top two tax brackets; and
  • revert to taxing all dividends at ordinary rates for taxpayers in the top two tax brackets.

In addition, the president would eliminate a pre-2003 law provision that allowed high-income taxpayers an 18 percent tax rate on capital gains on assets owned more than five years.

Those tax increases would allow marginal tax rates at the highest income levels to return to rates scheduled after 2012 under current law. Some high-income taxpayers with long-term capital gains would pay more tax because the 20 percent rate exceeds the 18 percent rate that would apply to gains on assets held more than five years and because the phaseout of personal exemptions would begin at a lower income than under current law.

*The threshold for heads of household would be $225,000 and that for married couples filing separately would be $125,000, both measured in 2009 dollars and indexed for subsequent inflation.