On Jan. 1 Congress allowed two tax breaks that benefit the wealthy to become effective. The cuts eliminated current provisions of the tax code that limit 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.
Only two weeks before the cuts took effect, Republicans in Congress voted to reduce spending on programs benefiting the poor and the middle class by $39 billion over the next five years.
Deductions for wealthy restored
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.
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 2 percent of their personal exemption for every $2,500 by which their income exceeded $218,950 for married couples and $145,950 for singles.
It’s not about simplifying
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.
No cuts for vast majority
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 voted to cut $11 billion over the next five years from Medicaid, the health care system that serves America’s poor. Substantial reductions made in childcare assistance will result in 255,000 children living in poverty losing federal assistance.
Congressional Republicans cut $343 million in funding for foster care programs. These reductions 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. In fact, over the next five years these tax breaks from the Pease and PEP tax cuts exceed the savings from all of the reductions in low-income assistance programs that Congress voted to cut.