Bush tax cuts 101: What changes could be in store for taxpayers?

If Congress does nothing, the Bush tax cuts expire at the end of this year. Here's a look at the options now being debated.

This fall, Congress will face a thorny political and economic issue: whether to extend the so-called Bush tax cuts.

When Congress passed the tax relief act in 2001, the US Treasury had a surplus, which economists predicted would grow to $5.6 trillion 10 years down the road. Instead, the United States has an estimated deficit this year of $1.34 trillion. If the federal government extends all those tax cuts this fall and takes no other actions, America could be looking at $9 trillion or $10 trillion in accumulated red ink over the next decade.

Still, it appears that the political will exists to extend many of the tax cuts. On Sept. 8, in a speech in the Cleveland area, President Obama threw down the gauntlet to the GOP, saying that Democrats were "ready, this week ... to give tax cuts to every American making $250,000 or less.

On Sunday on the CBS show "Face the Nation," House Republican leader John Boehner of Ohio said he was still in favor of not raising taxes for all Americans. But, when pressed on whether he would hold middle-class tax cuts hostage to cuts for the wealthy, he said, “If the only option I have is to vote for those at 250 (thousand dollars) and below, of course, I’m going to do that.”

However, Don Stewart, a spokesman for Senate Republican leader Mitch McConnell of Kentucky, said there are no Republicans in the Senate who support the partial tax cut extension, the Associated Press reported on Monday.

Unless Congress acts, almost all the tax cuts or credits, which were enacted in 2001 and 2003, expire at the end of this year. Some Americans filling out their taxes in April 2012 would discover they owe Uncle Sam additional money. At the same time, married couples would go back to paying a "tax penalty." Next year, almost all workers would see their employers withhold more of their earnings.

What is scheduled to expire at the end of this year, unless Congress acts?

•The 10, 25, 28, 33, and 35 percent rates would all rise. The new tax rates would be 15, 28, 31, 36, and 39.6 percent. This would cost taxpayers about $157 billion per year.

•The indexing of the alternative minimum tax for inflation would end. The AMT, which provides $66 billion in annual relief for taxpayers, attempts to ensure that individuals who benefit from itemized deductions or credits pay a separately calculated minimum tax.

•Taxes on capital gains and dividends would rise, meaning that investors could potentially pay about $35 billion more.

•Married couples would go back to paying higher rates than today, at a cost to them of $32 billion per year.

•Expanded tax credits – such as the child tax credit, which went from $500 to $1,000 – would end. This would cost families $26 billion per year. Some taxpayers would also pay an additional cumulative $1.5 billion in education costs.

•The estate tax, which has already expired, would go back to its 2009 level, costing heirs at least $26 billion.

•Higher-income households would see the dollar value of their personal exemptions phased out and would have a lower value for certain itemized deductions. This would cost those people – most of whom make well over $170,000 a year – about $21 billion.

How have the tax cuts affected Americans' income?

Everyone from the poorest taxpayer to the richest saw disposable income rise as a result of the cuts. For example, a ­middle-class family making $52,224 a year (the middle 20 percent of all filers) had a one-year increase in their take-home pay of 2.4 percent, or $1,016 – almost enough for five nights of camping at Disney's Fort Wilderness Resort in Lake Buena Vista, Fla.

But the top 1 percent did far better: They saw an increase in their disposable income of 5.9 percent, or $72,872 – enough to buy a basic XJ Jaguar.

What does the Obama administration propose?

The administration wants to keep the AMT indexed, keep the tax cuts for the middle class (including capital-gains measures), extend relief for the so-called marriage penalty, expand the child tax credit, and increase tax credits for education. It also wants to reinstate the estate tax and expand the earned-income tax credit, which is for low-wage earners.

The Obama proposal would retain about 82 percent of the dollar value of the Bush tax cuts and would keep taxes about the same for 98 percent of taxpayers, according to an estimate by the Tax Policy Center, a joint effort between the Urban Institute and the Brookings Institution.

"The 2 percent not included are the highest-income taxpayers," says Adam Looney, a senior fellow at Brookings and policy director of the Hamilton Project in Washington.

How would taxes change for the richest Americans?

In addition to the changes in exemptions and itemized deductions, the Obama proposal would allow other taxes to rise for couples filing jointly who make more than $250,000 a year, Mr. Looney says.

The biggest shift would be for the top 1 percent – people who make at least $600,000 per year. A household making $1.8 million would pay an additional $53,675, estimates the Tax Policy Center. Those in the top 0.1 percent of all wage earners – roughly 120,000 taxpayers, who make an average of $8.367 million – would pay about $310,140 in additional taxes.

How would Republicans pay for potential tax cuts?

According to Boehner's press secretary, Michael Steel, Republicans would cut spending by $1.3 trillion over 10 years through such efforts as freezing federal pay, hiring only one person for every two who leave government, and adopting a cut-and-cap approach to discretionary spending. Most of the Republican plans have not been analyzed by the independent Congressional Budget Office to determine their impact on taxpayers and government revenue.

Does Congress have other options?

At a Senate hearing on July 14, Leonard Burman, a professor of public affairs at Syracuse University in New York, suggested extending the low- and middle-income tax cuts for three years – as long as Congress also makes a "rock solid" commitment to enact wide-ranging tax reform that would raise enough revenue to pay for the government's activities and spending.

On Sept. 7, Peter Orszag, who was until recently Mr. Obama's director of the White House Office of Management and Budget, proposed extending the middle-class tax cuts for two years. To get Republicans to vote in favor of that, it would be worth it to include the high-income tax cuts, he says.

But Mr. Orszag, who presented his views in an op-ed in The New York Times, warned that whoever is president in 2013 would have to be tough, most likely vetoing any bills that might attempt to extend tax cuts further.