How ‘massive’ is Obama’s tax cut/tax increase?

at 06:00 AM ET, 07/10/2012


(Susan Walsh/AP)

“What the President is proposing is therefore a massive tax increase on job creators and on small business. Small businesses are overwhelmingly being taxed not at a corporate rate, but at the individual tax rate. So successful small businesses will see their taxes go up dramatically and that will kill jobs.”

— Former governor Mitt Romney, “The John Fredericks Show,” July 9, 2012

“President Obama’s response to even more bad economic news is a massive tax increase. It just proves again that the President doesn’t have a clue how to get America working again and help the middle class. The President’s latest bad idea is to raise taxes on families, job creators, and small businesses.

— Romney campaign spokesperson Andrea Saul, statement, July 9, 2012

In an election-year gambit, President Obama has once again called for extending the Bush era tax cuts for people making less than $250,000, while letting them lapse for wealthier Americans. The proposal has virtually no chance of becoming law, at least before the presidential election, but the campaign of presumptive nominee Mitt Romney responded by labeling it a “massive tax increase.”

 Let’s see how big this tax proposal really is.

 

The Facts

 There are many facets to the tax cuts enacted under former President George W. Bush — which The Fact Checker covered as The Washington Post’s economic policy reporter in 2001 — but the biggest part concerned an across-the-board reduction in tax rates. Every taxpayer benefited from those rate cuts, but because the wealthy pay the largest share of income taxes, they ended up with the biggest proportion of tax cuts.

For technical reasons — mainly to squeeze a bigger tax cut in a smaller budgetary box — Republicans in 2001 cleverly structured the Bush tax law so it would terminate after just nine years. (In effect, the move allowed them to fit a $1.6 trillion tax cut in a budget that called for a $1.3 trillion tax cut over 10 years.) That’s because the Republicans used a parliamentary procedure known as reconciliation, which meant the tax bill did not need 60 votes to avoid a filibuster in the Senate. (The final version passed with 58 votes, after originally getting 62 votes in the Senate before the tax cuts were enlarged.)

  In 2010, Obama extended all of the tax cuts for two years, and now they are due to expire at the end of the year. He now proposes to extend the rate reductions — but to restore the pre-Bush tax rates on income above $250,000 for families and $200,000 for individuals.

 Even so, few people appear to realize that even the wealthy would continue to receive the benefit of the lower rates on income below $250,000, compared to the expiration of the law. In a 2010 study, the Tax Policy Center estimated that, in 2012, 97 percent of people making between $500,000 and $1 million — and nearly 93 percent of millionaires — would continue to receive a tax cut.

For millionaires, the average tax cut would be nearly $28,000. However, the biggest share of the tax cuts — about 33 percent — would go to people making $100,000 and $200,000. (Note: the income figures in this chart are a bit of out of date; it also does not show the impact of Obama’s higher taxes in investment income in his health care law.)

 An alternative method is to look at how much money would be raised under this proposal. Obama’s proposal to extend the tax cutes for income under $250,000 in 2013 would reduce revenue by $150 billion, according to the White House. (For reasons too complicated to explain, that is a 10-year estimate, but much of the revenue loss would be in the first year.)

That compares to a decrease in revenue of $215 billion if the upper-income rates were also extended. This week’s proposal officially does not include a fix for the alternative minimum tax, a tax on the rich which increasingly snags middle-class Americans, which is why outside analysts say the revenue loss could be even higher.

 Now, we can already hear objections from some readers that we are looking at this backwards — that you need to assume all tax cuts are designed to continue. Under that view, Obama would be doing nothing for people making less than $250,000 — and simply hiking taxes on the rich to the tune of $65 billion.

“It sounds like you’re going after the current policy/current law argument,” said Romney senior adviser Eric Fehrnstrom. “The intent was not for any of this tax relief to expire in 2010, or again this year. The only reason these tax cuts are temporary is because the budget reconciliation process used to pass them limited their duration to the 10 year budget window.”

 But the law is the law. The tax cuts are due to expire at the end of the year, and a new law is needed for them to continue. There should be a consequence for the budgetary games that were played in 2001, when the tax bill was designed to get around objections by some senators that it should be limited to $1.3 trillion over 10 years.

(Note: Democrats can also be guilty of this rhetorical Pinocchio, most recently during the debate over the extension of the student-loan law, which Democrats crafted. President Obama also claimed that failing to extend his payroll tax holiday was akin to a “tax increase”--a point still touted on the White House Web site. But as we frequently say, two wrongs don’t make a right. Indeed, if Obama fails to yet again extend the payroll tax cut, that “tax increase” on January 1 would wipe out the benefits of this tax cut for many middle-class Americans.)

 As for the statements about Obama raising taxes on “job creators,” we have written before that Republicans tend to exaggerate this effect. The Joint Committee on Taxation has determined that only 3 percent of all “small businesses” would be affected by Obama’s proposal, a point the president noted on Monday. However, that 3 percent does account for 50 percent of the estimated $1 trillion in business income reported in 2011.

Still, there are limitations with this data because the number of tax returns filed by “flow-through entities” — such as law firms — has soared in recent years. We have also previously noted that a recent Treasury Department study, using a broad definition and a narrow definition of small businesses, found that 11 percent or 8 percent of the returns, respectively, showing income of more than $200,000 had some small business income. Under the broad definition, these businesses represented 64 percent of small business income; under the more narrow definition, such firms had 57 percent of small business income.

But Romney’s assertion that taxes affect business hiring decisions is simplistic. When we have written about this issue before, small business owners specifically rejected the idea that higher taxes would “kill jobs.” They noted that income that is used for business expenses — such as employee wages — are fully deductible. “I invested more in my business, especially as tax day drew near, because the alternative was giving a big slice of the money to Uncle Sam,” one small business owner said.

 

The Pinocchio Test

 The law is clear: The Bush tax cuts will expire at the end of the year, and a new law is needed to enact new tax cuts. By the numbers, it is difficult to make the case that this is a “massive tax increase.” The president’s proposal would reduce revenue by some $150 billion, and virtually all taxpayers would get some benefit from the proposal.

 Now, under “current policy,” wealthier taxpayers would see an increase in taxes. We tend to avoid philosophical disputes, but certainly as a matter of philosophy one could argue that Obama is proposing to boost taxes on the wealthy.

 But Republicans in 2001 wanted to have their cake and eat it too, which is why the tax cuts were designed to sunset in the first place. If they had agreed to a smaller tax cut, as some Democrats had demanded, the rate changes would have become permanent — and then the president’s proposal could legitimately be called a tax increase.

The insertion of the words “current policy” would make the Romney statement more accurate, but as it stands it is misleading, especially given the decision by Republican lawmakers to structure the tax cut in this manner.

Two Pinocchios

 


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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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