The Democrat Evolution on Middle Class Tax Rates
On May 26, 2001, Democrats had the opportunity to demonstrate that they supported across the board tax cuts that significantly reduced the tax burden for groups they claim to care about: the middle and lower classes. At 10:11AM that day, however, 154 Democrats voted No on the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).
This bill had the following implications by 2006: reduction of individual income tax rates from 15, 28, 31, 36, and 39.6 percent to 10, 15, 25, 28, 33, and 35 percent.
28 Democrats that year were sensible enough to vote Yea.
Some balked at the suggestion that the Laffer curve could work under President Bush like it did under Presidents who cut taxes before him. Unsurprisingly though, receipts from individual income taxes did increased by 47% through 2007, when the mortgage crises began.
Some may point out that in 2001 Democrats had a legitimate alternative to the Republicans’ across the board tax relief legislation. This assertion is wrong.
Charlie Rangel offered an alternative bill that would have reduced the 15% tax bracket to 12% on the first $10,000 on a single flier’s return. It also gave everyone a $225 tax credit for joint filers and expanded the Earned Income Tax Credit.
Rangel’s alternative targeted low income earners and taxed most of their income at a higher rate than the Republican plan. What is clear is that Democrats did not have any intention of cutting taxes for middle class workers, let alone those making up to $250,000.
Tuesday’s fiscal cliff vote was significant for the Democrat party. 66 of the same Democrats who voted against EGTRRA in 2001 voted for Tuesday’s fiscal cliff bill. The same party that overwhelmingly opposed a reduction of taxes on middle income Americans in 2001 extended the rates Republicans brought to existence for those making under $400,000 in 2013.
Fast forward to May of 2003.
The Jobs and Growth Reconciliation Tax Act (JGTRRA) passed by a margin of 231 to 200. This legislation lowered the capital gains and dividends rate to 15% and provided a 50% bonus depreciation allowance. Bonus depreciation allows businesses to deduct business expenses like equipment from their taxes, which encourages investment.
In addition to an extension of the bonus depreciation allowance, the fiscal cliff deal preserves the 15% capital gains and investment rate for married couples making less than $450,000 and single people making less than $400,000.
In an ideal world where Democrats didn’t control Washington, these rates would have been extended for everyone. By permanently linking dividend and capital rates together, however, the Tuesday compromise was a partial permanent enshrinement of the 2003 tax cuts that Democrats opposed by a margin of 198-7 in 2001. 97 of those same Democrats who voted against JGTRRA in 2001 voted Yea on the fiscal cliff bill in 2013. Many would consider this an accomplishment.
What now? For years, Democrats have been campaigning on raising the top tax rates. Special thanks to Obamacare, successful business owners and individuals now pay more today than they did under Clinton. Mission accomplished for them. The debt still stands at $16.4 trillion and we’re set to hit the limit in less than 2 months.
As Politico points out, “Democrats readily acknowledge that they’ve exhausted their ability to raise taxes on the richest Americans by jacking up their rates… that politically speaking, there’s virtually no way to keep increasing marginal tax rates.” Taxpayers and small businesses sigh in relief.
The next two months will be strife with conflict as Democrats and Republicans try to figure out how to accomplish that which modern day Democrats have never been willing to do: cut spending.
What are your thoughts? Where should Congress start in the process of identifying cuts? (Obamacare costs at least $1.76 trillion for example…)