Many readers made comments or sent e-mails about two recent columns: a Geppetto Checkmark this week for Rep. Paul Ryan (R-Wis.) and his assertion concerning effective marginal tax rates in President Obama’s budget and an examination last week of Obama’s reference to Israel’s “1967 lines” in his Middle East speech.
We are grateful for the thoughtful analysis and vast knowledge demonstrated by our readers. It only helps us do our job better in the future.
In particular, there were a number of questions about two relatively arcane issues: the impact of the “PEP/Pease” tax provisions on the marginal tax rate and whether Netanyahu in 2010 had previously said something similar to Obama.
Yes, this is down-in-the-weeds stuff, but we got enough questions that we thought it would be worth addressing the issues in a separate column.
“PEP” refers to Personal Exemption Phase-out. “Pease” refers to the late Rep. Don Pease (D-Ohio), who pushed through the legislation limiting itemized deductions. President Bush eliminated them but Obama’s budget plan would reinstate them.
Ryan calculated that reinstating “PEP and Pease” would add about two percentage points to a wealthy person’s effective marginal tax rate. We thought his estimates appeared in the ballpark.
But some smart readers noted that eventually these very complicated tax provisions are fully phased out and thus no longer affect a taxpayer’s marginal rate. They are right and we should have made that clear.
In particular, the PEP provision actually is fully phased out just as a taxpayer begins to reach the 39.6 percent tax rate. So PEP really hits people in 36 percent tax bracket, not the 39.6 percent tax bracket.
The Pease provision stops when it has reduced a taxpayer’s itemized expenses by 80 percent. So the impact depends on the value of itemized expenses a taxpayer claims. Of course, the richer you are, the higher your itemized expenses will be (i.e., bigger mortgage, more state and local taxes and so forth.)
For those who want to know more, the Tax Foundation last year published an interesting report on the impact on these provisions. For a hypothetical couple with no children and $20,000 in itemized deductions, the report shows that the PEP and Pease provisions adds about 3.2 percent to the effective tax rate when the couple is in the 36 percent tax bracket. The Pease provisions by themselves would impact the 39.6 tax bracket until it phases out at about $525,000 of adjusted gross income.
Each tax circumstance is different, of course, and that is just one example. The Brookings-Urban Institute Tax Policy Center has previously said, “Pease is effectively just an income tax surcharge, equal to 3 percent of the taxpayer’s marginal tax rate.”
Mark Robyn, an economist at the Tax Foundation who pointed us to this link, said: “Another way of explaining this is to say that if high-income people tend to take a fixed percent of their income in itemized deduction (Internal Revenue Service data indicates that they do) then the 3 percent will never fully phase-out their itemized deductions, and will therefore continue to increase their marginal effective tax rate.”
We should have noted that these provisions eventually phase out for the very rich and no longer impact their marginal rate. But there is still an impact at the 39.6 percent rate that roughly mirrors Ryan’s calculation, and thus our judgment on his statistic remains unchanged.
(Other readers questioned why we did not focus on the fact that the wealthy receive significant income from dividends and capital gains, which are taxed at rates much lower than wage income. That’s true, but we were examining an assertion about the marginal rate of wage income, not the overall tax rate on all income. Obama has also proposed raising taxes on investment income.)
Netanyahu’s 2010 statement
Last week we took a close look at this statement by President Obama and how it differed from statements on Israel’s boundaries by other U.S. presidents: “The borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps, so that secure and recognized borders are established for both states.”
But several readers argued that Israeli Prime Minister Binyamin Netanyahu appeared to say something similar in a joint statement with Secretary of State Hillary Rodham Clinton: "The United States believes that through good-faith negotiations, the parties can mutually agree on an outcome which ends the conflict and reconciles the Palestinian goal of an independent and viable state, based on the 1967 lines, with agreed swaps, and the Israeli goal of a Jewish state with secure and recognized borders that reflect subsequent developments and meet Israeli security requirements."
Some readers cited a column by Andrew Sullivan that called this “the money quote” and claimed that “1967 line ” phrasing is “an idea of the Israeli Ministry of Foreign Affairs.” But other analysts have made similar claims.
Time columnist Joe Klein wrote: “Indeed, this exact formulation was used by Israel’s Ministry of Foreign Affairs after Hillary Clinton met with Netanyahu on Nov. 11.” And Fareed Zakaria in The Washington Post also cited this “statement jointly issued by Secretary of State Hillary Clinton and Netanyahu on Nov. 11, 2010.”
With all due respect to the e-mailers, Sullivan, Klein and Zakaria, this is not the same thing as Obama’s statement last week.
As mentioned in our original post, Clinton first said this carefully worded statement in 2009, and then repeated it many times. This phrasing mentions “the 1967 lines” and “agreed swaps” in the context of a “Palestinian goal.” This is then matched with a specific “Israeli goal,” which included reference to “subsequent developments” (i.e., Jewish settlements on the West Bank.)
When Obama last week dropped the reference to “Palestinian goal,” he made it official U.S. policy. That’s the difference. Such nuances, arcane as they may seem, loom large in diplomacy.
Moreover, if you read the full joint statement closely, you will see that Netanyahu does not even endorse Clinton’s phrasing. This sentence is framed as a quote by Clinton, as in: “The Secretary reiterated that ‘the United States believes that through good-faith negotiations….”
Thus, it is incorrect to claim that either Netanyahu or his foreign ministry ever used this formulation in the past. If they had, the language would not have been attributed only to Clinton.
(The Fact Checker actually covered this meeting while a diplomatic correspondent and this joint statement was considered pretty lame by reporters at the time. Our article said: “Clinton and Netanyahu's offices issued a joint statement reiterating the two sides’ diplomatic boilerplate on peace efforts.”)