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And the winner is… George W. Bush

By Edward Zelinsky


The American Taxpayer Relief Act of 2012 is widely understood as a victory for President Obama. However, the long-term story is more complicated than this. The Act in large measure confirms in bi-partisan fashion the tax-cutting priorities of George W. Bush.

In the Act, President Obama achieved his proclaimed goal of increasing income taxes on the country’s most affluent taxpayers through higher income tax rates and reduced deductions. The Act creates a new 39.5% income tax bracket for individuals with taxable incomes above $400,000 and for married couples filing jointly with taxable incomes above $450,000. It phases out personal exemptions for individuals with adjusted gross incomes over $250,000 and for married couples with adjusted gross incomes over $300,000. It also reduces itemized deductions for these affluent taxpayers.

For high income taxpayers, the Act increases the maximum capital gains tax rate from 15% to 20%. When combined with the new Medicare tax on investment income, this results in a combined tax of 23.8 % on capital gains for the highest income taxpayers.

It is thus unsurprising that the Act has been heralded as a triumph for Mr. Obama and his vision of a more progressive income tax law.

However, the reality is more complex than this. For the long run, the winner under the Act was Mr. Obama’s predecessor, George W. Bush. The Act, as it gave Mr. Obama some of what he wanted, also made permanent much of what Mr. Bush desired as a matter of tax policy. Indeed, as a result of the Act, federal taxes are in important measure now permanently at the lower levels where President Bush wanted them.

The vast majority of Americans are not affected by the Act’s changes for the highest income taxpayers. For most taxpayers, the Act thus permanently ratifies the lower federal income tax rates championed by Mr. Bush in 2001. Moreover, the Act confirms that corporate dividends will be taxed at lower capital gains rates rather than as ordinary income. True: capital gains rates are now higher for the most affluent of taxpayers as a result of the Act. However, even at these higher rates, taxing dividends as capital gains, rather than as regular income, significantly reduces the tax burden on such dividends.

Consider, moreover, the federal estate tax. When President Bush took office in 2001, the federal estate tax applied to estates over $675,000. That floor was scheduled to increase in stages to $1,000,000. The maximum federal estate tax rate was then 55%.

While President Bush did not succeed in abolishing the federal estate tax, the Act provides that federal estate taxation will only apply to estates over $5,000,000 adjusted for increases in the cost of living. For 2013, an estate must be over $5,250,000 to trigger federal estate taxation. When it applies, the estate tax will be levied at a flat rate of 40%.

In the area of tax policy, President Bush did not achieve all he sought. No president does. If we define success more realistically, the 2012 Act confirms President Bush’s triumph in permanently lowering federal income tax rates for most Americans, reducing the effective tax burden on corporate dividends, and significantly reducing the reach of the federal estate tax.

To some, these tax reductions are welcome restraints on the federal leviathan. To others, the Bush tax reductions, now permanent, regrettably hamper the federal fisc. What cannot be doubted is that the Internal Revenue Code we have today in large measure reflects the tax-cutting priorities of George W. Bush. In adopting the Act, a Democratic President and Senate, along with a Republican House, permanently confirmed much of these tax-reducing priorities.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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