First Person: The Tax Cut Extension and the Rest of Us

It's the position and charge of the IRS to collect taxes, no matter what the current tax brackets are or who is currently subjected to those rates.

That being said, as an employees of the Department of the Treasury and a taxpayer myself, I readily observe what the House is planning on doing regarding the expiring year-end tax cut bill.

On December 2nd, House Democrats pushed for and managed to pass legislation that sees the 2001 Bush era tax cuts permanently extend for most middle class incomes but not for those who earn over $250,000 annually. The bill now must pass the GOP-controlled Senate floor, where it is not expected to be approved unless major modifications are made.

White House spokesman Robert Gibbs issued this statement after the vote:

"The President continues to believe that extending middle class tax cuts is the most important thing we can do for our economy right now and he applauds the House for passing a permanent extension. But, because Republicans have made it clear that they won't pass a middle class extension without also extending tax cuts for the wealthy, the President has asked (Office of Management and Budget) Director Lew and (Treasury) Secretary Geithner to work with Congress to find a way forward. Those discussions started just yesterday and are continuing this afternoon. The talks are ongoing and productive, but any reports that we are near a deal in the tax cuts negotiations are inaccurate and premature."

So things are stalled in the bicameral Congress, which is in no way surprising. As far as real dollars, assuming the bill stays somewhat intact, what do these tax cuts mean for you and I?

Some background on the $1.3 trillion tax cuts in effect since 2001. Tax rates were brought down 3 to 5 percent across the board in all income brackets, the estate tax was phased out, the so-called marriage penalty was reduced (not a penalty in of itself but a term used to describe a situation where couples filing together are subjected to greater taxation than if they were to file separately as single individuals) and the Child Tax Credit was doubled from $500 to $1,000 per child.

As far as the numbers go, if the tax cut expires for couples earning more than $250 thousand annually ($200 thousand for single earners), they can expect to pay an estimated $8,000 more per year in taxes, which would increase revenue by an expected $7 billion.

So should the higher earners among us get a tax break, or are they expected to shoulder a greater burden? Many individuals have less money, a few have more. It would stand to reason that since the vast majority of Americans fall into middle class incomes, a tax hike for them would be more damaging than the same tax increase on the wealthy.

What about small businesses? How does the tax cut extension affect them?

Be aware that the same thresholds apply to small businesses. Only approximately 2 percent of all small businesses yield more than $250,000 in annual pass-through income. So it's unlikely that any expiration of the tax cut would impact your business as it stands now.

Too, it's important to understand what the definition of a small business is. For tax purposes, the category of small businesses is not necessarily a family owned or a sole proprietor main-street type mom & pop store. In fact, many wealthy 'businesses' are not truly businesses as all. They could be individuals who have structured their incomes in such a way so that taxes are reduced through the establishment of entities like shareholder corporations, estates, partnerships, trusts, hedge funds and the like.

What about the trickle-down initiative? Aren't tax cuts to the wealthy designed to be reinvested into the economy and thus filter down to the middle class? Perhaps, but they don't. According to reports by the Congressional Budget Office, for every dollar in tax cuts as little as ten cents is returned to the struggling economy.

For the most part, the Bush tax cuts will remain in effect for the majority of us, leaving a few extra bucks in our wallets and leaving us to ponder the movements of Congress.

More From This Contributor:
Do I Qualify for the IRS Earned Income Tax Credit?
Who is Your Dependent?
Who Pays the Alternative Minimum Tax?