Why the Top Two Rates Could Go Up

By November 21, 2012 Individuals

Nearly two years ago, I sat in a year end tax planning conference and watched as the presenters changed their presentations on the fly and instructed us to ignore certain powerpoint slides.  It was late December and Congress was busy deciding what the world of US taxation would look like about a week after the conference ended.  Eventually, they decided on a two year extension.

This year, it’s more of the same.  Congress has about a month left to figure out what will happen with the Bush tax cuts after 2012.  These current rates affect nearly every family in the United States.  The only way to avoid dealing with the issue would be to do what Congress did last time: kick the can down the road.

One likely outcome could be a framework for future tax reform talks combined with a bill that extends rates for everyone but the top two brackets.  In lieu of actually writing a bill that increases taxes, something Republicans have vowed against, the current top two Bush tax rates would be allowed to ride off into the sunset and leave us with the Clinton era rates of 36% and 39.6%.

Gordon Gray, director of fiscal policy at the American Action Forum, writes this morning that if Congress does let those two rates slip with a promise of dealing with them next year; that will be the end of the story.  He argues that if the top two rates expire this year, next year the CBO will label any reinstatement as a tax cut for the top earners, even if it is simply returning those tax rates to 2012 levels.  On the other hand, letting those rates expire is not seen as a tax hike by Congressional scorekeepers.  I believe he is correct.

Congress may be diametrically divided on most things when it comes to tax policy, but one thing they can agree on is that now is not the time to raise taxes on the middle class and poor.  They don’t have to write a “Buffett rule” or other tax hike into law to pass a deal.  All they have to do is not write an extension for the top two brackets.  If Gray is right, steering us away from the fiscal cliff by letting those rates expire may be the path of least resistance.

It’s only the end of November.  Stay tuned.