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Tax moves to make in June 2012

The $1 million tax rate threshold's possible fiscal and political costs

First $250,000 was designated the dividing line between wealthy taxpayers and the rest of us mere mortals.

Then along came a really rich guy, billionaire Warren Buffett, who complained that the tax code was too easy on him and his rich compadres.

That led to Obama's proposed Buffett Rule, which set the cutoff for potentially higher taxes at $1 million.

Now the $750,000 difference between the original Democratic top tax bracket and millionaires is causing a bit of a stir, both politically and financially.

A higher top tax bracket? Although Obama agreed to let the Bush tax cuts continue through 2012, the prez has consistently called for the raising of the tax rate of individuals making $250,000. (We'll leave the trend of tax abdications for another post.)

That quarter of a million top tax bracket figure has been cited regularly by Obama, in his budgets, communications with Congress and in his political campaign messages.

Nancy PelosiSo it was a bit of a surprise last week when House Minority Leader Nancy Pelosi bumped up the top tax bracket to $1 million.

Maybe she misread the Buffett Rule.

Or perhaps, as some cynics have argued, she's pandering to her own wealthy campaign supporters.

No, say Pelosi supporters, her letter to House Speaker John Boehner is a way to set up the GOP. When he shoots down her idea she and the Dems can point out that Republicans oppose curtailing tax cuts even for millionaires.

Or maybe she's just pulling a Joe Biden.

Remember when the talkative veep outed Obama's personal change of heart when it comes to same-sex marriage? The White House said it had planned to make the prez's evolution on this issue public, just not as soon as it did once Biden voiced his opinion.

So maybe Pelosi is just testing the water so to speak, to see if she can cajole Boehner to give a bit -- and convince his party to go along with him this time -- on the top income tax bracket.

That's essentially the scenario Pelosi noted at a press conference last week. She said she preferred a tax hike for those who earn more than $250,000, but "we haven't gotten the $250,000" so she decided to call for a tax hike for those earning $1 million or more.

She elaborated in an op-ed piece in the May 30 issue of USA Today:

"Democrats have always opposed the Bush tax cuts for the wealthiest Americans. Since President Obama's election, we have repeatedly called for an end to tax cuts for those making more than $250,000 a year. Republicans have rejected this effort, holding tax relief for the middle class and small businesses hostage to permanent tax breaks for millionaires, Big Oil, and corporations that ship jobs overseas."

At what cost? We know that the San Francisco Democrat has taken some political heat from the party faithful for her tax bracket shift upward.

Now we also know the fiscal cost of a higher income tax bracket cutoff.

The Center for Budget and Policy Priorities, a Washington, D.C., organization that advocates for lower-income Americans, says that with a cutoff for tax breaks at $1 million instead of $250,000, Uncle Sam would forgo $366 billion in lost revenue over the next 10 years.

1M vs 250K tax bracket cutoff_CBPP_053012ax-f1

Pelosi's proposed higher threshold would raise 44 percent less in revenue over the coming decade than the $250,000 cutoff, according to new estimates from Congress' Joint Committee on Taxation,.

Citizens for Tax Justice, another D.C.-based tax policy research group, has released estimates showing a virtually identical percentage revenue loss.

And that uncollected income would have to be covered by budget cuts elsewhere.

Keeping the $250,000 threshold, however, would produce $829 billion in deficit reduction over the next ten years and $965 billion in total deficit reduction when debt-service savings are included, according to Joint Tax Committee calculations.

Tax bonus for millionaires: But the numbers that have really riled up folks are those showing the effect on millionaires.

Individuals making $1 million or more would benefit substantially from the Pelosi proposal, says the Center for Budget and Policy Priorities:

"They would receive roughly half of the tax cuts from raising the threshold from $250,000 to $1 million, according to Citizens for Tax Justice, because they would continue to get the full benefit of the Bush tax cuts on all of their income between $250,000 and $1 million.

In the same vein, even extending the tax cuts for households making up to $250,000 would give millionaires a tax cut — in this case, on the first $250,000 of their incomes — compared to letting all of the tax cuts expire.

In fact, in dollar terms, millionaires will receive larger tax cuts than middle-income households even if the threshold is set at $250,000. The disparity will grow substantially if the threshold is set at $1 million."

At this point, all the mathematics are moot since today Boehner took the tiny bit of will-they-won't-they GOP suspense out of the proposal by rejecting Pelosi's tax overture.

But you can expect to hear it and other taxes on higher income earners debated as the Dec. 31, 2012, Bush tax cuts sunset approaches.

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