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Tax Cut Issue: Who Counts as "Rich?"

Congress is debating whether to extend the tax cuts from the Bush years. There is the issue of whether an extension would help or hurt the economy, but at an even more basic level, there is debate about the basic fairness of tax rates. Orange County tax lawyers who are looking at tax rates with clients can see the issue clearly: is it fair for a person who earns more than $200,000 a year to be taxed at rates similar to people who make, say, $5 million?

The Obama administration has proposed preserving the cuts for middle-class Americans and letting them expire for the top 2.5 percent of taxpayers -- individuals who make more than $200,000 a year and families whose income exceeds $250,000.

However, even allies of the President are wondering if raising tax rates on "millionaires and billionaires" should include families making $250,000.

Democrat James Webb of Virginia has said, "I think the $250,000 level is too low. I'm asking that it be raised."

Some proposals are calling for eliminating the Bush tax cuts for people with seven-figure income or more.

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The cuts will expire for everyone on Jan. 1 unless Congress takes action, so lawmakers are virtually certain to revisit the issue in the lame-duck session after the November election.

In some expensive parts of the country, many families with income levels near the $250,000 cutoff insist that they have more in common with middle-class Americans than millionaires or billionaires.

The tax code not only has far lower rates than it had a half century ago, it has fewer brackets -- just six. The Obama plan would raise the top bracket (which affects income for individual filers who earn over $382,550) to 39.6 percent, from 35 percent. It would also raise the second-highest bracket to 36 percent, from 33 percent. Mr. Obama's plan would charge the same rate on the 382,551st dollar of earnings as it would on the 30 millionth.

The fact that families making $250,000 are sometimes being invoked in the same terms as billionaires is a symptom of one of the paradoxes of the American tax system: at the same time that wealth has become far more concentrated in recent decades, the tax code has become far less precise in differentiating levels of affluence.

Source: New York Times "In Tax Cut Plan, Debate Over the Definition of Rich" 9/29/2010

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