Senate Democrats passed a so-called middle class tax cut this week on a mostly partisan vote, but the move was more political theater than tax legislation. For months, the Democrats, with President Obama leading the charge, have hammered home that they want to preserve lower tax rates for those Americans earning less than $250,000 a year and help pay for lost federal revenues by making wealthier individuals pay higher taxes. But, in fact, even if the bill were to become law -- which it won't -- most middle class taxpayers will see their taxes go up come January unless Congress gets serious about real tax reform.
Senate Minority Leader Mitch McConnell says the bill is unconstitutional -- and, on its face, he appears to be right. Article I, section 7 of the U.S. Constitution requires: "All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills." The House is scheduled to vote on its own tax bill next week, but the Republican-controlled House is likely to pass an across-the-board extension of existing tax rates, and compromise between the two chambers appears unlikely.
If no uniform bill passes and is signed into law, rates will revert to the pre-Bush tax cut rates -- which will mean big tax increases for everyone. The lowest earners, who make less than $34,550, would see their rates increase from 10 percent to 15 percent, but that 5 percent increase would hit everyone on their first $34, 550 of income. The same would apply as each of the marginal rates bumped up from 25 percent to 28 percent, from 28 percent to 31 percent, from 33 percent to 36 percent, and from the current top rate of 35 percent to 39.6 percent.
So it's not just "the rich" who will suffer if Congress doesn't act. And these increases don't even count other expiring provisions that would reinstate the marriage penalty, increase taxes on capital gains and dividends and other soon-to- expire reductions in payroll taxes, which affect low-income workers hardest.
Nonetheless, the Democrats seem to see it to their advantage to promote class envy, accusing the Republicans of only caring about the rich. Virtually no economists believe that passing a tax increase in a struggling economy is a good idea -- but somehow President Obama and Congressional Democrats believe they can limit the damage by supposedly only taxing those who can "afford" it.
But who are those "wealthiest Americans" the Dems keep citing? Illinois businessman Wilson F. Hunt Jr. recently passed on to me the details of how his small business, which he owns with his wife, will be ensnared in this scheme to soak the rich. Last year, his company reported $1.5 million in 2010 income. But because his company elects to pay taxes as a Sub-chapter S Corporation, all the company's profits are reported on the couple's individual income tax returns as the sole shareholders in the company. They paid almost $1.1 million in taxes in 2010, yet the couple paid themselves only a combined salary of $189,000. The rest of the income was put into retained earnings, which the company could then use to expand its business the following year.
Hunt explains it this way: "In order to earn a salary of $189,000 and continue growing our business last year, we had to pledge our house and most of our personal assets to a bank as collateral on a business loan. If the business were to fail, we could lose our home and life savings." Yet the Democrats vilify people like him as the rich out to cheat the middle class.
As Hunt points out, if he gets to keep more of the income his company has earned instead of paying higher taxes, he'll "create additional jobs and tax revenue next year with about a million dollars in the private sector, 'shovel-ready stimulus spending' on new computer hardware and software, professional services for installation, plus carpenters, electricians and plumbers to construct offices and a new parking lot."
We shouldn't envy people like Hunt; we should thank them for helping build an economy that makes us all better off. But don't try to convince Democratic politicians -- they're too busy stoking class resentment to appreciate that some of those "millionaires" are the ones out there actually creating jobs.