While rejecting the Democrats’ proposal not to extend the lower rates of tax enacted under President George W. Bush for the highest-earning taxpayers, the Republican Party in the United States House of Representatives passed their own bill to extend all of the tax cuts.
Following the similar bill passed by the Democrat-controlled Senate on July 25, the Democrats on the Ways and Means Committee introduced the Middle Class Tax Cut Act into the Republican-led House on July 30. As proposed by President Barack Obama, the Democrats’ bill would not extend the Bush tax cuts for the highest-earning taxpayers, defined as individuals making more than USD200,000 per year and households with annual income of USD250,000 or more.
However, Republicans in the House, repeated their intense opposition to Obama’s proposal, in their belief that not extending the tax cuts for those individuals earning over USD250,000 would have a serious effect on small businesses, that predominantly use pass-through corporate structures, and therefore also on jobs in the economy.
They point out that, according to an Ernst & Young study, the Democrats plan would destroy over 700,000 American jobs, while they also believe that a rise in taxation is the opposite to what is required given the fragile state of the US economic recovery.
On their side, Democrats in both the Senate and the House have latched onto Joint Committee on Taxation data that shows how the Republican Party’s policies would only benefit the highest-earning taxpayers, and would, by 2021, have cost USD155bn more to the US fiscal deficit than their proposals.
The Republican proposals in the Job Protection and Recession Prevention Act of 2012 would in fact go beyond merely extending the Bush tax cuts for one year for all taxpayers.
In addition, for example, the marriage penalty with respect to the standard deduction and the exit point for the 15% tax rate bracket, the USD1,000 child credit, and various education-related tax benefits, including the expansion of the student loan interest deduction, would be extended through 2013, while a two-year alternative minimum tax relief 'patch' would be provided, covering both 2012 and 2013.
Furthermore, the bill would prevent the estate tax from reverting to the 55% top tax rate, with a low exemption amount of USD1m, in force up to 2001. Under the Republican proposal, for 2013, the top rate would remain at the present 35% with a USD5m exemption (indexed for inflation).
Finally, the lower tax structure on long-term capital gains and qualified dividends would also remain for all of 2013. Under current law in effect for 2012, the top statutory rate on long-term capital gains is 15%, but that is scheduled to rise to 20% in 2013. Under current law, the top statutory rate on qualified dividends is also 15%, but is scheduled to rise to 39.6% in 2013, when dividends will once again be taxed at ordinary income tax rates.
Those prospective increases would be avoided, as would the new 3.8% surtax on net investment income – including capital gains and dividends – which will otherwise apply to taxpayers with incomes above USD200,000 (single individuals) and USD250,000 (joint returns) in 2013.
However, given all of the above, neither the Democratic nor the Republican proposals are likely to be passed through both sides of Congress, but are merely part of the political manoeuvring before the November elections..
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