This week there was a lot of media coverage of the tentative agreement reached between the Obama Administration and congressional Republicans to extend the Bush-era tax cuts. The agreement came after the GOP leadership announced its intention to block any legislation during the current “lame duck” session until the tax issue was resolved. In return for extending the Bush-era tax cuts for two years, unemployment benefits will be extended for another 13 months and all Americans will get a 2% break on Social Security payroll taxes. These news stories assume you know what all these things are and how their passage will affect the budget and the country. We're here to walk you through some of the issues and the jargon.

Let's start with marginal tax rates, which are at the heart of the tax cut issue. Marginal tax rates are the tax rate on the last dollar you earn. This is where “tax brackets” come from: for every dollar you earn between $0 and $16,750, you pay 10% of that to the federal government. If you earn less than $16,750, that 10% is your marginal tax rate. If you earned $35,469, you go up to the next “tax bracket”. Everything you earned beyond your first $16,750 (in this case an additional $18,719) is taxed at 15%, and so your marginal tax rate is 15%.

This system of tax rates and brackets is the basis of the federal individual income tax code. This spreadsheet provides a great look at tax rates over the years; pay very close attention to the huge changes between 2001 and 2002. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act, which changed both the tax rates and the tax brackets. In the linked analysis by the Congressional Budget Office (CBO), they project the loss of income from these tax cuts is through this fiscal year (FY 2011), and they're pretty astounding - $117 billion.

Two years later, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which sped up implementation of some of the tax breaks included in the 2001 bill and added others. With the passage of this bill, the CBO estimated that government revenues would decrease by $536 billion from 2003-2013 and outlays – many tax changes result in new government spending – would increase by $13.8 billion. Together, these two bills are what are referred to by the “Bush tax cuts”. By design, most of the changes in tax rates and tax brackets were supposed to automatically phase out, or sunset, by 2010.

Here lies the roots of the current debate. Republicans, as a whole, want to make the Bush tax cuts permanent. President Obama has proposed keeping them for all but the top 2% of American income earners. How much do you have to make to be in the top 2%? $250,000, according to the Census. Yet at the same time the tax rates for the wealthiest Americans have fallen, their incomes have soared . The wealthiest 1% of the U.S. population have seen their incomes rise a whopping 281% over the last thirty years.

The deal made between President Obama and the Republicans has not been voted on by the full Congress yet, and some Senators are threatening to block it by filibustering. Essentially, filibustering a bill means debating it endlessly, which denies the Senate from taking a vote on it either way. (Fun fact: filibuster comes from a Dutch word meaning pirate!) The only way to end a filibuster is for 60 members to vote for cloture, (i.e., forcing an end to debate) but this is very difficult to obtain, because neither party has the 60 votes necessary.

Taxes have long been an ideological divide between the parties. The current debate about extending, ending, or making permanent the Bush tax cuts is crucial, because they will add enormous sums to the debt. The Center on Budget and Policy Priorities estimates that the fiscal effects of these tax cuts will hurt the government's bottom line more than either the bank bailout or the stimulus package.

Further adding to the costs of the current proposals is the 2% cut in payroll taxes which would lower the Social Security tax rate from 6.2% to 4.2% on income up to $108,600 (after which social security taxes do not apply). This provision would cost an estimated $120 billion. Additionally, the long-term unemployed will receive up to another 13 months in benefits from the federal government, to the tune of $56 billion. This unemployment extension will not, however, help those individuals who have already run out of benefits (the so-called “99-ers,” who have gone through the maximum 99 weeks of benefits).

Will any of these options help stimulate the economy? This is, after all, why Republicans and Democrats say they are pushing these various options. According to the CBO, extending unemployment benefits almost certainly helps spur the economy (look at the summary table). That same document suggests that cutting payroll taxes probably won't break even, and that tax cuts really won't help – an assertion borne out by the increasing burden the Bush tax cuts are already placing on our deficit.

Ezra Klein of the Washington Post raises a good point in this recent article: what happened to all the deficit talk? Mere weeks ago, every commission, congressperson, and policy center was racing to put out proposals for reducing the debt. Yet this week, we'll add almost $900 billion dollars to the debt if this compromise legislation goes through.

Whatever happened to priorities?