The current income tax rate structure was put in place by Title I of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA is scheduled to sunset on January 1, 2013. The rate structure will then revert to its much higher, pre-2001 levels.
If Title I is allowed to expire in 2013, marginal income tax rates will increase for all taxpayers by up to one third. The largest increase will occur in the lowest tax bracket, which will adversely affect low-income earners. In fact, 60% of the 2001/2003 tax relief went to middle- and low-income earners.
A key principle of taxation is that if an activity is taxed, individuals will do less of it. Allowing income tax hikes, then, will discourage and cheapen the value of activities that earn income—namely, work and productivity. This would have a significant contractionary effect on the U.S. economy at a time when Americans can least afford it.
The individual income rate hikes would hurt small business as well, because 95% of all U.S. non-farm businesses are structured so that they file taxes through their owner at individual income tax rates. Hiking individual income tax rates, then, will result in fewer jobs and more expensive goods, as small business owners reach deeper into their pockets to pay the tax man.
2013 Cost to Taxpayers
Office of Management and Budget: $120 billion
