What’s the difference between raising tax rates and raising tax revenue? (And why does this matter politically?)

December 7, 2012

(AP)

(An earlier version of this post incorrectly described President Obama’s proposed tax increases for upper-income Americans. Obama wants to freeze tax rates for most Americans while applying a higher rate of 36 percent to net household income of more than $250,000 per year and 39.6 percent to net household income of more than $400,000. It has been updated.)

Why haven’t President Obama and lawmakers determined how to avoid jumping over the “fiscal cliff”? In a word: taxes.

At the end of the year, tax rates are scheduled to increase on nearly all Americans, raising hundreds of billions of dollars of new revenue but costing the average family about $2,000 a year in take-home pay.

A person’s tax rate is the percentage of income paid in taxes. There are currently six tax rates, ranging from 10 percent to 35 percent. Unless policymakers make changes before Jan. 1., those same categories will range from 15 percent to 39.6 percent.

As part of fiscal cliff negotiations, Obama wants to freeze tax rates for most Americans while applying a higher rate of 36 percent to net income of more than $250,000 per year and 39.6 percent on net income of more than $400,000. The president’s plan would reduce federal borrowing by about $1 trillion over the next decade, according to White House estimates.

Republicans have begun acknowledging that the rich will need to pay more taxes, given Obama’s reelection and strong public support for the idea. But they have held firm against the idea of raising rates, proposing  to raise $800 billion over the next decade by closing loopholes and ending deductions for top earners instead.

Obama also hopes to overhaul the tax code by eliminating some deductions and loopholes that primarily benefit the wealthy and the financial industry. Those changes would generate an additional $600 billion in savings over a decade on top of the
$1 trillion in proposed tax increases, according to the administration.

Democrats generally believe that the Republican proposal doesn’t generate enough tax revenue to keep the government afloat, meaning that Congress would need to close the gap by either raising tax rates on the middle class or by dramatically scaling back popular deductions such as the one for charitable giving.

Republicans and Democrats say they agree in principle that eliminating tax deductions to generate more revenue is better than raising tax rates. But most also agree that a mix of both will be necessary to stave off a cliff jump. The question is whether one side ultimately prevails or whether a deal is struck that allows both sides to declare at least a partial political victory.

Lori Montgomery and Zachary A. Goldfarb contributed to this report.

Share your thoughts in the comments section below.

Follow Ed O’Keefe on Twitter: @edatpost

Ed O’Keefe is a congressional reporter with The Washington Post and covered the 2008 and 2012 presidential and congressional elections.
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