Both President Obama and Treasury Secretary Tim Geithner have made it clear that the US administration’s policy would be to let the tax cuts introduced by President Bush lapse for the wealthiest families, when they expire at the end of this year.

The tax cuts introduced by President Bush in 2001 and 2003 expire at the end of this year and, if no other decision is made, the rates of income tax will revert to their previous levels.

Those tax cuts reduced the lowest income tax rate from 15% to 10%, the 28% rate to 25%, the 31% rate to 28%, the 36% rate to 33%, and the top marginal tax rate went down from 39.6% to 35%. In addition, there were reduced rates on capital gains and dividends.

The evolving policy of the current administration appears to be to allow the top two tiers of income tax, that is, those on incomes above USD250,000, revert to their previous levels of 36% and 39.6%, while maintaining the tax cuts for those on lower incomes. There would also be an increase in the top rate of capital gains tax from 15% to 20%.

On the other hand, the Republican Party in the House of Representatives are pressing for the extension of all of the tax cuts. As the mid-term elections approach after the summer, it can be expected that this battleground will gain further prominence.

Geithner said, in interviews, that it would be responsible to let expire those tax breaks that only affected the highest-earning 2%-3% of Americans. It would, he said, show fiscal responsibility and demonstrate that the US was serious in looking to reduce its budget deficit.

President Obama, in his most recent weekly address, said that some that the Bush tax cuts were part of the reason why the previous economic boom had been more excessive. He attacked Republican proposals to extend all of the tax cuts, saying that they would “permanently keep in place the tax cuts for the very wealthiest Americans – the same tax cuts that have added hundreds of billions to our debt”.