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Tax Issues in the 2008 White House Race

 

The Republican Presidential Primary: And In This Ring... 12/21/07

McCain's Tax Plan: I Was Wrong About Everything
 
Senator John McCain (R-AZ) released his tax plan on Wednesday, which consists of repealing the Alternative Minimum Tax (AMT) without paying for it, extending the Bush tax cuts without paying for them, and requiring a 3/5 majority of both chambers of Congress to enact any tax increase.
 
Remarkably, this is the same senator who voted against the biggest of the Bush tax cut packages in 2001 and 2003. During a debate on September 5 he explained that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that the tax cuts have boosted revenues, which would seem to imply that no cuts in spending are ever needed to pay for tax breaks.
 
This seems to be the position he has settled on, since he has no plans to pay for any of his tax cuts and has a somewhat vague proposal to require a "3/5 majority vote in Congress to raise taxes." Since even revenue-neutral bills are considered tax increases by the GOP now (because they offset the costs of, say a lower corporate rate by closing tax loopholes that benefit somebody) this apparently means a supermajority would be needed to enact any basic tax reform. John McCain is now committed to the idea that tax cuts will pay for themselves and even raise revenues. 
 
(Those who are tuning in late to this ongoing debate may be utterly confused as to why anyone thinks tax cuts could cause revenues to increase. Anti-tax activists have convinced some conservative politicians that cutting taxes actually increases revenues because tax cuts encourage work and investment so much that incomes and profits increase enormously, in turn increasing tax collections by more than enough to make up for the costs of the cuts. Mainstream economists do not believe this and Bush's own Treasury Department and OMB director have admitted that they don't believe it either.)
 
Also, McCain would like to stop taxing "innovation" by making permanent the ban on internet access taxes and by banning taxes on cell phone use. As we've argued before, it's a shame that Thomas Edison didn't think to lobby for a moratorium on taxing electric devices, or that Henry Ford didn't lobby for a moratorium on taxes on automobiles, since those products were innovations for their time. McCain would also make permanent the research credit, which is a tax subsidy for certain companies supported by politicians who can't decide whether the free market works or doesn't work.
 
Huckabee's 50% Sales Tax
 
Now that former Arkansas governor Mike Huckabee has been climbing in the polls, reporters are suddenly inconvenienced by the need to read up on and explain the tax proposal Huckabee has been touting for months. His proposal is often described as a 23 percent national sales tax, but supporters prefer to call it the "Fair Tax," because they've apparently figured that the idea of a new sales tax is not inherently appealing to people. Actually the tax would be 30 cents on an item that costs a dollar, which most of us would call a 30 percent tax, but supporters argue that 30 cents is only 23 percent of $1.30. But that's not even half of the problem. Citizens for Tax Justice studied this proposal back in 2004 and found that to actually replace all the revenue collected by our current tax system, the national sales tax would actually have to be set at a rate of 50 percent.
 
So to recap:
The proposed national sales tax rate claimed by Fair Tax supporters: 23%
The proposed rate as any normal person would define it: 30%
The rate necessary for the Treasury to break even under realistic assumptions: 50%
The chances of anything like this being enacted: 0%
 
Giuliani's' Mind: A Place More Peaceful than Reality
 
Most Republican candidates reveal some sort of ambivalence or inner-conflicts over tax and fiscal matters. On one hand, they're all fairly intelligent people who must understand that revenues cannot be increased by tax cuts. On the other hand, they must find some way to appeal to the masses who want to hear the good news of free tax cuts without any troubling analysis that might disprove this appealing message. Hence you see McCain's convoluted explanations of his votes, Huckabee's attempts to avoid discussing the less right-wing aspects of his governorship, and Romney's policy acrobatics.
 
Former New York mayor Rudy Giuliani's mind appears to be serene and untroubled by such turmoil. He has been able to maintain throughout his campaign so far that the way to raise revenue for any initiative is to cut taxes, apparently freeing himself from any complicated thinking. He continued hammering this appealing message home at the debate on December 12. He argued that the solution to our national debt is that "the federal government has to restrain its spending" and that we need a policy "leaving more money in the pockets of the American people" without showing the slightest awareness of how little sense this makes.  
 
Romney's Offshore Tax Evasion
 
Meanwhile, it has come to light that former Massachusetts governor Mitt Romney "was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in US companies." In other words, Romney was using a shell company -- a company located, on paper only, in a tax haven country -- to avoid paying taxes on money he was investing for his clients and himself. He had a similar arrangement in Bermuda. His campaign staff maintains that this was all perfectly legal. As far as we're concerned, that is the real scandal. 

 



What the Presidential Candidates Are Saying about Taxes: Update - 11/30/07
 
Republicans
 
The Republican candidates are in many ways stuck in a routine that does not look very promising. They all support lower taxes but are unable to square this with the fact that Americans aren't clamoring for the drastic cutbacks in public services that new tax cuts would inevitably require. They have generally tried to wish this fact away with the claim that tax cuts actually result in increased revenues (because tax breaks encourage work and investment and thus profits and incomes explode, pushing revenues up). Unfortunately for them, President Bush's own Treasury Department has refuted the idea that tax cuts come even close to paying for themselves, and recently OMB director Jim Nussle also conceded the same thing.
 
But we still hear this claim made at the Republican presidential debates as candidates pander to anti-tax extremists. All of them support making the Bush tax cuts permanent and must explain away the fact that this will cost $5 trillion over ten years. 
 
Giuliani and McCain: Denying Reality to Win Over Republican Voters 
 
To cite just one example, former New York City mayor Rudy Giuliani said on October 9 that as mayor he cut taxes 23 times, including cutting income taxes by 24 percent, which he says resulted in a 42 percent increase in the revenue collected from the income tax. (It would have been inconvenient for him if any of his opponents had pointed out that he happened to run the city during a stock market surge that boosted incomes, but no one seemed interested in making that point.) Some people have questioned his claim to have cut taxes 23 times.
 
Senator John McCain still presents one of the more interesting attempts to rationalize a tax policy that is truly irrational. One would like to believe that he is among the saner candidates at the GOP debates since he voted against the tax cut bills enacted in 2001 and 2003. He explained once again on September 5 that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent." This is baffling. Why was he adamant about cuts in spending if tax cuts actually raise revenue? Under his logic, he can afford even more spending if we cut taxes.
 
Both these candidates are also known for their proposals to use the tax code to push families toward the individual health insurance market (the market for coverage that is not employer-based). Individual-based health coverage is usually much more expensive, has less generous benefits, and may be more likely to involve high deductibles that discourage people from getting care they actually need. Giuliani would offer deductions for such health care, while McCain would offer credits (which are slightly fairer but still have the same underlying problem).
 
Romney: Make the President All-Powerful and We'll Get the Budget Under Control
 
Former Massachusetts Governor Mitt Romney at least seems to acknowledge some relationship between taxes and public spending that coincides at times with reality. However, he claims to stand for smaller government and his strategy to bring about reduced spending, to go along with reduced taxes, is a "line-item veto." He criticized Giuliani for opposing the line-item veto that President Clinton exercised briefly before it was struck down by the Supreme Court. But the proposal Romney favors now is different and technically not a true line-item veto, although it's still possibly unconstitutional.

The legislation he's talking about would probably be similar to what the Republican House passed last year, which would allow the President to single out spending provisions in an appropriation bill (or a bill to expand entitlements), withhold funds and force Congress to vote to approve or reject the rescission (cancellation of the spending). The President would be allowed to withhold funds for a total of 90 days, even if Congress rejects the rescission. This would obviously be an unprecedented expansion of the President's power, and it's not at all clear that a president would necessarily use this power to reduce deficits (it could be used to expand them, actually).
 
Romney favors making permanent the Bush tax cuts for capital gains and dividends (which resulted in the current 15 percent tax rate for those forms of income) but would go further by eliminating taxes on income from interest, capital gains and dividends for families with incomes less than $200,000. Few middle-class people could really benefit from these sorts of tax cuts. Roughly three fourths of the current tax break for capital gains and dividends went to the richest 0.6 percent in 2005 (as Citizens for Tax Justice pointed out recently).
 
Thompson: Alternative Maximum Tax, Paid for by Cutting Social Security
 
Former Senator Fred Thompson recently introduced his own tax plan, which involves eliminating the AMT, extending the Bush tax breaks, and cutting the corporate rate to 27 percent. His plan also allows taxpayers to choose to pay under the existing system (minus the AMT and with the Bush tax cuts) or under a simplified system that would have just a 10 percent rate and a 25 percent rate and almost no deductions or credits. This is essentially a plan introduced last month by the House Republicans that CTJ dubbed the "Alternative Maximum Tax." Because the "simplified" option would eliminate refundable tax credits now available to low-income working families, it would be of no benefit to the poorest one-third of Americans. Wealthy families, however, would get huge tax reductions.
 
When asked recently how he would pay for his plan, Thompson said that his tax cuts would cause "growth in the economy" that would result in more revenue. The only change in spending he mentioned was his plan to cut back the Social Security benefits that are promised to future retirees.
 
Huckabee: The National Sales Tax
 
Former Arkansas Governor Mike Huckabee continues to tout his plan for a 23 percent national sales tax to replace all other federal taxes. Supporters call this plan a "Fair Tax." CTJ studied the idea of a national sales tax in 2004 and found that in order to maintain current revenue levels, this sales tax would have to be around 50 percent. Low-income households would pay more for everything they buy, while the wealthy would hit the jackpot with tax-free capital gains, dividends and interest.
 
At the October 9 debate Huckabee made the astounding claim that this national sales tax plan "untaxes the poor in our culture." The "Fair Tax" plan does include a monthly, prepaid rebate to households that would theoretically balance some of the regressive effects of the tax on low-income households. But CTJ's study in 2004 of a similar plan found that even after accounting for these "prebates" as supporters call them, the plan still increases taxes on the poor and cuts them for the rich. Further, if the rate would really be as low as 23 percent, that implies massive cuts in public services will be necessary -- and these cuts probably would not come at the expense of the wealthiest families.
 
 
 
Democrats
 
Social Security Stealing the Show
 
The recent debating among the Democratic candidates has been a little more sane but still confused. A disproportionate amount of time and energy has been focused on whether or not the cap on earnings subject to Social Security payroll taxes (currently at $97,500) should be raised to deal with the alleged crisis the program is facing.

On October 30, Senator Hillary Clinton made the important point that the talk of "crisis" is generally a talking point used by conservatives who want to privatize the program. This is largely true. The assumptions used to make dour projections about Social Security's insolvency starting in 2041 are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions are borne out and benefits scheduled to be paid in 2041 must be reduced by 25 percent, they would still be larger in real terms than those benefits paid today.
 
Clinton also made the valid point that the most important thing we can do now for Social Security is to start with "fiscal responsibility." The only real problem Social Security has right now is that through the Bush years Congress and the President have spent the Social Security surplus. Social Security currently is taking in more in payroll taxes than it pays out in benefits, and this surplus can be used to pay down the national debt, thus making it easier for us to pay benefits when the baby boomers retire in large numbers. However, Presidents and members of Congress have typically spent these surpluses on other things, except for a period during the 1990s under President Clinton. Finding a way to balance the budget without spending the Social Security surpluses, in other words, basic fiscal responsibility, is indeed the place to start.
 
Senator Clinton did falter however, when she argued that raising the payroll tax cap would be a tax increase on middle-class Americans. Senator Barack Obama pointed out at the next debate on November 15 that only 6 percent of taxpayers have incomes above the cap so it's simply dishonest to say that raising the cap would constitute a tax increase on "middle-class" people.
 
But then again, Obama himself seemed to be accepting this logic on October 30, when he said that perhaps they should raise the cap, "potentially exempting folks in the middle -- middle-class folks..." Most people probably took that to mean something like what John Edwards has proposed, which would not raise the cap for people with earnings between the current cap and $200,000 but then raise it for those with incomes beyond $200,000. This would of course create a very peculiar "donut-hole" in the Social Security payroll tax between $97,500 and $200,000 in earnings.
 
It's also important to note that Social Security replaces a proportion of earnings (a smaller proportion for high-income people), but only those earnings that are actually covered by the Social Security payroll tax. So just as there is a limit on what wages are taxed for Social Security, there is a limit on how much a wealthy person can collect in benefits. It's unclear whether or not plans to raise the cap on wages covered by Social Security payroll taxes would also raise this limit on benefits that can be collected by wealthy individuals.
 
The Need to Focus on Undoing the Bush Tax Cuts
 
Lately, the Democratic debates have not focused on the most important tax issue of all, which is also the one they largely agree on. Will the Bush tax cuts be made permanent or not? None of the Democratic candidates would make them permanent (at least not entirely). This is crucial. CTJ projects the total cost of the Bush tax cuts over the 2001-2010 period to be about $2.4 trillion, all deficit-financed. Even if the Bush tax cuts are allowed to expire at the end of 2010, as they are scheduled to under current law, the interest on the increased debt resulting from these tax cuts would keep costing us -- to the tune of $1.5 trillion in the 2011-2020 period. Then, if the tax cuts are made permanent on top of all that, that would cost another $5 trillion from 2011 through 2020.
 
But the Democratic candidates want to hold on to some tax cuts for the "middle-class." Which tax breaks to extend therefore becomes a trickier question. Each of the Democrats wants to stand up for the middle-class, but there is some confusion about what that would even mean. Former Senator John Edwards would repeal the Bush tax cuts for those with incomes above $200,000, but IRS data for 2005 show that only 2.7 percent of taxpayers had adjusted gross income above this level. The top 2.7 are the only folks who would lose their tax cuts.
 
Senator Barack Obama tries equally hard to appear pro-middle-class. His plan would cut taxes for 150 million Americans at a cost of $85 billion a year. He would give families a credit of $1000 (or $500 for unmarried taxpayers) and eliminate income taxes for seniors whose income is below $50,000 (although seniors in this category pay little in income taxes anyway). The credit would essentially offset payroll taxes on the first $8,100 in earnings. But it's not entirely obvious that what people in this income category really need is more tax cuts when the revenue spent on this plan could be spent on health care, retirement security or energy efficiency.
 
But Edwards and Obama both are certainly moving in the right direction. They would both restore the progressivity of the tax code that has been reduced dramatically under Bush. They also want to reduce the tax code's bias for income from wealth over income from work. Edwards would increase the tax rate for capital gains to 28 percent for those with incomes above $200,000 and Obama would raise it to as much as 28 percent for those with incomes over $250,000. When Bush took office, capital gains, which flow mostly to the wealthy, were already taxed at a special low rate of 20 percent. In 2003 that was reduced to 15 percent and dividends, which were previously taxed as ordinary income, were also made subject to the special 15 percent rate. As a result, people who live off of their investments or inherited wealth can actually pay federal taxes at a lower rate than many middle-income people. Edwards and Obama would both end this outrageous feature of the tax code with their higher rates for capital gains.
There are some minor variations among these plans. Edwards wants to make the first $250 in income from wealth (interest, capital gains, dividends) tax-free, which could save a middle-income family $63 at most each year. Obama would eliminate capital gains taxes on startup businesses, which is a strange idea because capital gains is not involved in the starting up of businesses but rather in the selling of assets. But these details are far less important than the overall progressive direction in which both candidates would take tax code.
Senator Clinton has spoken in more general terms about her ideas on taxes. She would also restore much of the progressivity lost during the Bush years by repealing the Bush tax cuts for those with incomes above $250,000. She has not stated whether she would also propose further tax changes for capital gains.

The Democrats' Plans Still Have Costs

But even these more progressive tax plans have costs that must be addressed. The Bush tax cuts expire at the end of 2010. That means that when Democratic candidates say they will do away with the Bush tax cuts for families above a certain income level, that really means they're going to extend the tax cuts for families with incomes below that level. In other words, new tax cuts are being offered, just not to the richest Americans. Whether and how we would pay for these new tax cuts, along with the health care plans and other initiatives promised by each Democratic candidate, is crucial and has not been fully explained yet by any of them.


Democratic Presidential Candidates Address Fiscal Issues in Debates - 9/28/07

Democratic Presidential candidates participated in debates on September 20 and September 26 that addressed taxes, Social Security, health care, and other issues. 
 
Health Care
 
The candidates seem to vary in how they claim their health care reform plans would be paid for. Even if his numbers don't always add up, former Senator John Edwards is relatively honest about his plans. He cited his proposal to eliminate the Bush tax breaks for those making over $200,000 and raising the rate for capital gains to 27 percent.
 
Senator Hillary Clinton seemed to suggest on the 20th that increasing efficiency with electronic records and other reforms can raise billions of dollars and pay for her plan to provide families the same health insurance options that federal employees have as well as tax credits for those who cannot otherwise afford to buy these plans. New Mexico Governor Bill Richardson said he disagrees with John Edwards and that no new taxes are needed. But then he said he would "eliminate the two percent" by which we think he means ending the tax breaks for the wealthiest two percent (which sounds an awful lot like what John Edwards wants to do actually) as well as raise $77 billion by cutting corporate welfare.
 
Social Security
 
On Social Security, Richardson is slightly less confused. On the 26th, he pointed to the fact that the program may not really be in grave danger because the assumptions used to make the oft-cited projections of insolvency are overly pessimistic. The other candidates seemed more convinced that Social Security really does face a crisis. Senators Christopher Dodd and Joe Biden said the cap on wages subject to Social Security taxes should be raised, while Senator Barack Obama (who was present on the 26th but not the 20th) would rather remove the cap entirely so that all earnings are subject to Social Security taxes.
 
Clinton won't say what she would do for Social Security exactly. On both nights, Edwards put forth the peculiar idea of creating a donut hole in Social Security taxes. The first $97,500 of earnings would be subject to the tax as is the case currently, then earnings between that amount and $200,000 would not be, and then all earnings over $200,000 would be subject to the tax.
 
Besides the question of whether Congress can actually constrain itself from spending Social Security surpluses as discussed above, these proposals also raise the question of whether or not support for the program would erode to any significant degree if the funding mechanism was made this progressive. The wealthy people who would be affected by these proposals see a much smaller fraction of their wages replaced by Social Security benefits than low- and middle-income people. On the other hand, it's not clear that support for Social Security is really linked to how it's funded.
 
Tax Incentives

The candidates also vary in the extent to which they're willing to use the tax code to affect behavior. Senators Dodd and Gravel favor a tax on carbon to reduce emissions that contribute to global warming. Governor Richardson favors using the tax code to encourage everything from higher wages to technology companies to unionization. We would argue that Governor Richardson's proposals stray a bit from the function and purpose of the tax code, which is to fund government services.

 


Barack Obama Releases Tax Plan - 9/21/07

This week presidential candidate Barack Obama announced the broad outlines of his plan to cut taxes for 150 million Americans at a cost of $85 billion a year. The plan would give families a credit of $1000 (or $500 for unmarried taxpayers) and eliminate income taxes for seniors whose income is below $50,000. The credit would essentially offset payroll taxes on the first $8,100 in earnings.
 
Low- and middle-income seniors (who generally don't face payroll taxes) could benefit from being removed from the federal income tax rolls, although that demographic is not paying a whole lot in federal income taxes anyway. The plan also includes a tax credit for home mortgage interest, since the current home mortgage interest deduction is not available to non-itemizers and is regressive since it is worth less to those in lower tax brackets.
 
Reducing the Tax Break for Capital Gains 
 
To pay for the plan, the tax rate on capital gains would be raised to some unspecified level and loopholes and offshore tax avoidance would be targeted. Citizens for Tax Justice has recently decried the regressive nature of the current tax break for capital gains (which John Edwards also wants to reduce) as well as offshore tax evasion.
 
It's Progressive, But Is This What We Need? 

Obama's plan would certainly move the federal tax code in a progressive direction, but it's not entirely clear that the thing low- and middle-income Americans need right now is a tax cut. 

"I have no problem with them trying to undo all or most of the Bush tax cuts for the wealthy even if it's only for a couple of years, but there are so many huge fiscal problems that we should be very careful about proposing new trivial programs when there's so many real big programs we need to do something about," Robert McIntyre, director of Citizens for Tax Justice, told the Wall Street Journal after the Obama plan was announced.

 



Romney Tax Plan Unlikely to Help Middle-Class - 9/14/07
 
Presidential candidate Mitt Romney has presented a plan to allow income from wealth to go tax-free for people with incomes below $200,000. Romney favors making permanent the Bush tax cuts for capital gains and dividends (which resulted in the current 15 percent tax rate for those forms of income) but would go further by eliminating tax on income from interest, capital gains and dividends for families with incomes less than $200,000.
 
The plan is being presented as a boon for middle-class families who are trying to save, but few of the beneficiaries would be truly middle-class. Roughly three fourths of the current tax break for capital gains and dividends went to the richest 0.6 percent in 2005 (as Citizens for Tax Justice pointed out recently). The truth is that most wealth and savings are in the hands of the richest Americans.
 
"For people earning below $100,000, cutting the tax rate on interest, dividends, and capital gains means almost nothing," said Robert S. McIntyre, director of Citizens for Tax Justice, as quoted in the Boston Globe. "For those people earning between $100,000 and $200,000, you might be talking several hundred dollars in tax savings. Then, the question is, does he really have a plan that cuts off exactly at $200,000? That would be nuts - the person who makes $200,001 would be kind of angry."
 
At least one other presidential candidate has moved in a different direction. John Edwards would allow families a tax exemption of the first $250 of income from interest, capital gains or dividends, but he would raise the top capital gains tax rate to 28 percent while also expanding the EITC and child tax credit and matching savings up to certain limit for low-income families.

 


The Presidential Candidates on Taxes - 8/17/07

Given that the 2008 presidential race started two years before the election, one can be forgiven for failing to keep up on all the candidates' views on tax fairness. We have already been subjected to a dozen debates, a bewildering number of candidates and a variety of tax proposals. If you have not attentively followed the race so far, don't worry, because we've done the work for you. Here is a quick review of the ideas the 2008 presidential candidates have put forward so far.

 

Bad Ideas

Make Permanent the Bush Tax Cuts

The tax cuts enacted under President Bush are scheduled to expire at the end of 2010.  The Republican candidates want to make them permanent, including John McCain, a candidate who actually voted against the biggest tax cut bills in 2001 and 2003.  It seems that all the Democrats would let at least some parts of the Bush tax cuts expire. New Mexico Governor Bill Richardson has made noises indicating that he doesn't want to be associated with opposition to any sort of tax breaks. Even he seems to have indicated (in a debate on June 28) that any tax cut for the richest two percent "has to go," but he would replace those with new tax cuts for the middle-class or for certain companies that train and pay workers above the prevailing wage. (You can see whether those candidates who were in Congress during the Bush years voted for or against the Bush tax cuts by looking up their records in CTJ's Congressional Tax Report Card.)

 

Repeal the Estate Tax

The estate tax is a federal tax placed on substantial inheritances, much of which consist of capital gains that were never taxed. The Republican candidates would repeal it while most of the Democrats probably would not. Those Democrats who were in Congress at the time, Joe Biden, Hillary Clinton, Christopher Dodd, Dennis Kucinich, and Barack Obama, all voted against the Republican proposal to slash the estate tax last year. John Edwards would make permanent the estate tax rules that apply this year, which exempt an estate worth $4 million for a married couple. A report from CTJ put out early this year shows that the estate tax affected only the largest 0.8 percent of the estates of those who died in 2005 (the most recent year for which data are available).

 

National Sales Tax

A proposal that anti-tax radicals call a "Fair Tax" is basically a national sales tax that replaces all other federal taxes. It's misleadingly described as a federal sales tax of 23 percent, and former Arkansas Governor Mike Huckabee claimed at a May 15 debate that the transition to this tax would be revenue-neutral. CTJ studied the idea of a national sales tax in 2004 and found that in order to maintain current revenue levels, this sales tax would have to be around 50 percent. It is also very regressive.  Low-income households would pay more for everything they buy, while the wealthy would hit the jackpot with tax-free capital gains, dividends and interest. We are fairly confident that this proposal will go nowhere when people realize that a house that costs, say, $200,000 would cost $300,000 under this plan.

Republican candidates Duncan Hunter, Tom Tancredo, Ron Paul, Mike Huckabee, and even John McCain have expressed support for the "Fair Tax" proposal.  Former Senator Mike Gravel seems to be the only Democratic candidate in favor of this notion, and has claimed that a national sales tax would even solve global warming.

 

Flat Tax

Some Republicans favor a flat federal income tax rate as opposed to progressive rates. The idea is to tax all income at the same rate and its proponents misleadingly argue that this will lead to simplification. (Of course, in reality it's the various deductions and credits and other factors in the tax code, not progressive rates, that makes taxes complicated.)  Mike Huckabee, Rudy Giuliani, and Sam Brownback are in favor of this plan, although Brownback has a plan to employ an optional flat tax system that will keep both progressive and flat tax rates available. Brownback's idea is perhaps the most bizarre because it's even more difficult to see how we could simplify anything by having two different tax systems.

But of course the bigger problem with the flat tax is that it's just blatantly, unapologetically, regressive. Currently the wealthy pay income taxes at higher rates than middle-income and low-income families. (This helps balance out the regressivity of other taxes, like federal payroll taxes and state sales taxes.) A flat tax has just one income tax rate, which will be lower than the rates paid now by the wealthy and probably higher than the rates paid now by the middle-class. If the switch to a flat income tax is revenue-neutral, that means poor people will pay more in income taxes and rich people will pay less. If everyone can pay less, well, then it can't be revenue-neutral and must involve massive cuts in government spending. We'll take a wild guess that any such spending cuts won't be at the expense of the wealthy.

 

Increase Revenue by Cutting Taxes

Giuliani has said that new revenue can be generated by cutting taxes, which will cause the economy to grow so much that tax revenues paid to the federal government will actually increase. Giuliani, remarkably, told an audience on August 5 that we can raise revenue to fix collapsing bridges not by increasing the federal gas tax but by lowering taxes. And Giuliani is not alone among Republicans who believe this fantasy. In the May 15th Republican debate John McCain also claimed that the Bush tax cuts resulted in "dramatically increased revenues." 

What's remarkable is that McCain explains his votes against the Bush tax cuts in 2001 and 2003 by saying that needed spending reductions were not being made at the time taxes were lowered. But if tax cuts raise revenues, why should anyone care whether or not spending is reduced? Why not just keep cutting taxes until the revenues grow enough to pay for whatever spending we want? It's hard to believe that McCain doesn't see how absurd this theory is. One could be forgiven for thinking that he is contorting his positions in order to win over the conservative voters in the Republican primaries.

There's wisdom in the saying, "If it sounds too good to be true, it probably is." This saying applies to the theory that tax cuts raise revenues. President Bush's own Treasury Department issued a report last year that refuted the claim that tax breaks spark so much economic growth that they pay for themselves.

 

Tax Breaks for Healthcare

Rudy Giuliani's healthcare plan consists of a tax deduction of up to $7,500 for individuals and $15,000 for families who purchase health insurance.  But a tax deduction is worth the amount of the deduction times the top tax rate a family is subject to, so this offers more for the rich families in higher income brackets than middle-income or low-income families who actually need help obtaining health insurance.  And low-income people who pay payroll taxes, but not federal income taxes, get no benefit, even though they're the group most likely to be without healthcare. John McCain has proposed a $3,000 credit for healthcare. A credit is more progressive than a deduction since its value doesn't depend on the income tax bracket a family is in, but if it's not refundable it still won't help those who pay federal payroll taxes but not federal income taxes.

But the more important problem is that we should not use the tax code to push families towards the individual health insurance market (the market for coverage that is not employer-based). Individual health coverage is usually much more expensive, has less generous benefits, and may be more likely to involve high deductibles that discourage people from getting care they actually need.  

 

Eliminate the IRS

Mike Huckabee and Ron Paul, two Republican candidates, are both in favor of abolishing the Internal Revenue Service. It's not entirely clear who would administer the national sales tax these candidates support if there was no IRS.

 

Better Ideas

Repeal Bush Tax Cuts to Fund Other Priorities

While probably all the Democratic candidates would let at least some parts of the Bush tax cuts expire at the end of 2010, some have expressed interest in repealing certain parts of them before that time and using the revenue for other priorities like health care. Barack Obama and John Edwards both favor some version of this maneuver to fund their healthcare plans, with Obama repealing some tax breaks for families with incomes of $250,000 or more, and Edwards doing the same for families at $200,000 or more.

No reasonable person could disagree in principle with the idea of rolling back some of the tax cuts. By substantially cutting taxes, mostly for the rich, President Bush has managed to add $2.4 trillion to the national debt already, despite facing a small surplus when he came to office. By 2010, most of the benefits of those tax breaks will go to the richest 1 percent under the administration's budget plans.

However, repealing the Bush tax cuts does not create much new revenue compared to the budget baseline that Congress already uses, which assumes the Bush tax cuts will be allowed to expire at the end of 2010.

Obama has not specified how his healthcare program will be funded past the first year.  Edwards, on the other hand, claims that his healthcare plan with be funded permanently through the repeal of the 2001 tax cuts for those with income over $200,000. The cost of extending the tax cuts for those with incomes below $200,000 would reduce revenues, a cost that he has not yet accounted for. Although his heart is in the right place when it comes to healthcare, his plan could be improved with additional provisions to raise needed revenue.

But at least these candidates are facing the fact that taxes must be raised. Clinton is still "wrestling" with whether or not to increase taxes and she and Richardson (and to an extent, Obama) both seem to think that they can pay for their plans partly by eliminating inefficiencies in the healthcare system.

 

Stop Taxing Work More than Wealth

One extremely good idea proposed by John Edwards is to end the tax subsidy for people who have capital gains. One signature tax cut enacted by President Bush reduced the tax rate on capital gains from 20 percent to 15 percent and made dividends, which had been taxed as ordinary income, also taxed at 15 percent. At the end of 2010, that break will expire if Congress doesn't extend it and dividends will be taxed as ordinary income and capital gains will be taxed at 20 percent again.

But even the 20 percent tax rate is a break for the wealthy investors whose other income is mostly taxed at the highest ordinary income rate (currently 35 percent). CTJ recently found that the cost of the current tax treatment of capital gains and dividends was about $92 billion in 2005 alone and three fourths of that went to the richest 0.6 percent. Edwards has proposed taxing capital gains at 28 percent, which is certainly a huge step in the right direction.

Unfortunately, the Republican candidates would like to make permanent the tax breaks for capital gains and dividends and those who support a flat tax or national sales tax generally assume capital gains and dividends won't be taxed at all. Mitt Romney has the strange idea of making interest, capital gains and dividends tax-free for "middle-income" people. It's unclear how he defines middle-income given the CTJ data showing that capital gains and dividends mostly benefit the wealthy.

 

Close the Loophole for Carried Interest

The only thing more senseless than a huge capital gains tax break is allowing it for income that isn't a capital gain. Private equity fund managers, who can earn hundreds of millions of dollars, use a tax loophole to have part of their compensation that they call "carried interest" taxed as capital gains, and thus at the 15 percent rate instead of the 35 percent rate that applies to their ordinary income. Various arguments are being put forth by the industry to support this tax break, most of which are easily refuted. The bottom line is that they are getting paid for the work they do, just like the rest of us, and yet they pay a lower tax rate on the hundreds of millions they earn.

Hillary Clinton, Barack Obama, and John Edwards have all come out in favor of legislation proposed by Congressman Sander Levin (D-MI) to close this loophole. Chris Dodd has expressed some misgivings about the legislation but has not taken a position yet.

 

Taxing Carbon Emissions

Democratic candidate Chris Dodd has come out for a corporate carbon tax as a way to reduce energy consumption and reduce emissions of carbon dioxide into the atmosphere. Clinton, Edwards and Obama are for a cap and trade program, which could have the same effect. A cap and trade program would involve a cap on the total amount of carbon that can be emitted and would allow companies to buy and sell the rights to emit carbon. 

The only fear among some progressives is that under either a carbon tax or a cap and trade program, the added cost would likely be passed on to consumers in the form of higher prices that disproportionately burden low-income families. An increase in the cost of gasoline, for example, might have only a minuscule effect on the total budget of wealthy family, who would anyway be more able to rearrange their life to reduce driving. Eventually our concerns about the environment may have to be balanced against our concerns about the incidence of the cost of such policy changes. The outcome of that debate will hinge on what can be done to lower the costs for those who can least afford to pay them.

It should be noted that several candidates have expressed interest in ending tax subsidies for oil companies. During the debates, Biden, Edwards, and Clinton all expressed interest in taking this step in some form or another. These tax subsidies are described in CTJ's paper calling for their repeal and they make little sense at a time when oil companies are making record profits while the public wants to reduce and reverse global warming. 

 

 


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