Bush Tax Cuts News



CBO Confirms that Fiscal Cliff Tax Cuts Will Nearly Double Long Term Debt



| | Bookmark and Share

A new report from the non-partisan Congressional Budget Office (CBO) confirms that Congress's decision to make 85 percent of the Bush tax cuts permanent as part of the fiscal cliff deal will dramatically increase the annual deficit and the long term national debt going forward, something Citizens for Tax Justice (CTJ) has been projecting for years. In fact, the impact of the tax cuts was the biggest factor in causing the CBO to nearly double their estimate of the national debt from 52 percent of GDP to as much as 100 percent of GDP 25 years from now.

After digging all of us into this fiscal hole by passing these tax cuts, lawmakers like Wisconsin Representative Paul Ryan are using the CBO’s new, more dire debt projection to argue that it proves that "spending is out of control" and thus the solution to our fiscal problems is – wait for it – more spending cuts.

It's become "common-sense" to argue that the federal government should immediately cut spending to reduce the deficit, but this is mistaken. Over the past two years lawmakers have already enacted enough debt reduction (primarily through spending cuts) that the CBO projects that the national debt will actually go down slightly over the next decade, going from 73 percent of GDP in 2013 to 70 percent of GDP in 2022.  Even over the long term, when the debt is projected to grow substantially, "out of control" spending is not what is driving the increase that Paul Ryan is talking about. 

According to the CBO, even with the much talked about growth in healthcare costs and aging of the population, total spending on federal government programs will only grow a modest 10 percent over the next 25 years. The much more dire predictions of the growth in government spending that are often cited are largely driven by the projected increase in interest payments on the national debt, an amount which the CBO expects to nearly quadruple over the next 25 years if nothing is done.

Rather than being inevitable, the good news is that this massive increase in interest payments is entirely avoidable if lawmakers modestly increase revenue, rather than letting the debt substantially increase each year in order to cover the costs of massive tax cuts that were made permanent with the fiscal cliff deal in January. In fact, the CBO estimates that revenues would only have to increase by about 4.5 percent compared to current policy to stabilize the debt over the next 25 years and substantially reduce projected interest payments. Whether it's through ending corporate tax avoidance or reforming individual income tax expenditures, raising this modest amount of revenue could not only reduce the deficit but also have the added bonus of making our tax system more equitable as well. 



CTJ Releases New 2013 Tax Calculator



| | Bookmark and Share

Citizens for Tax Justice has a new online calculator that will tell you what you’d pay in federal taxes in 2013 under three different hypothetical scenarios:

1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.

2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.

3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is what actually happened.

Use CTJ’s online tax calculator.

The calculator illustrates the impact of the changes in personal income taxes (the expiration of some of the Bush tax cuts for the very rich and the extension of some 2009 provisions expanding the EITC and Child Tax Credit) as well as the health reform-related change to the Medicare tax and the expiration of the Social Security tax holiday.

The calculator demonstrates to the vast majority Americans that their personal income taxes are no different than they would be if all the Bush tax cuts were extended. (A CTJ fact sheet explains that less than one percent of Americans lost any part of the Bush tax cuts under the fiscal cliff deal that was enacted.)

But the calculator also demonstrates that the expiration of the payroll tax holiday — which lawmakers of both parties barely bothered to debate at all — affects middle-income people.

For more information, see CTJ’s fact sheet detailing the provisions in the fiscal cliff deal, as well as CTJ’s reports on the distributional effects and revenue impacts of the deal.

Photo of Calculators via Dave Dugdale (of Learning DSLR Video) and 401 K 2013 Creative Commons Attribution License 2.0



The Holiday's Over, Your Paycheck is Smaller



| | Bookmark and Share

While the fiscal cliff debate may have seemed abstract and technical to many Americans, the results of the tax deal has become much more tangible to 77.5% of Americans who are seeing their take-home pay decrease in their first paychecks of the year, due to the expiration of the payroll tax holiday.

Anti-tax, anti-government types in the media and politics have taken advantage of the confusion over the fiscal cliff deal to make it seem like it was one big tax hike. One even argued that President Obama tricked the American public when he said he would only increase taxes on the wealthiest Americans. This is utter nonsense because what the deal really did was simply let a slew of temporary tax cuts expire. 

As to the payroll tax holiday, President Obama actually supported another one year extension, but was forced to abandon it by House Republicans who largely opposed extending the holiday as part of the fiscal cliff deal. Going back even further, the temporary payroll tax holiday was only even put into effect in 2010 because President Obama demanded it, (albeit as a second choice to the much more effective Making Work Pay Credit which Republicans opposed), as part of his economic stimulus package.

Moreover, while many Americans may feel the pain from lower take-home pay this year compared to last, the reality is that the fiscal cliff deal made 85 percent of the Bush income tax cuts permanent. These rate reductions and other provisions were all written to be temporary and expire in 2010, but now they are permanent parts of the tax code and amount to $3.9 trillion in tax cuts over the next 10 years. In other words, rather than shifting America back to the Clinton-era tax rates, President Obama instead opted to make permanent the historically low Bush-era tax rates for 99.1 percent of Americans.

Finally, it’s worth remembering why we pay the payroll tax to begin with. It is the funding source for Social Security, one of the most successful government programs in US history. Although paying lower payroll taxes was nice for a couple years, the reality is that the holiday could not have been extended forever without endangering the long-term viability of Social Security’s funding.



New CTJ Numbers: How Many People in Each State Pay More in Taxes after the Fiscal Cliff Deal?



| | Bookmark and Share

The expiration of parts of the Bush-era income tax cuts under the fiscal cliff deal affects just under one percent of taxpayers this year, while the expiration of the payroll tax cut affects over three-fourths of taxpayers this year, according to a new CTJ report that includes state-by-state figures.

The fiscal cliff deal (the American Taxpayer Relief Act of 2012), which was approved by the House and Senate on New Year’s Day and signed into law by President Obama, extended most of the Bush-era income tax cuts but allowed all of the payroll tax cut in effect over the previous two years to expire.

The figures in the report show the percentage of taxpayers in each income group nationally and in each state who will pay higher income taxes or payroll taxes as a result in 2013.

Read the report



CTJ Reports Examine Revenue and Distributional Effects of the Fiscal Cliff Deal



| | Bookmark and Share

The legislation signed into law by President Obama on Wednesday makes permanent 85 percent of the Bush-era income tax cuts and 95 percent of the Bush-era estate tax cut still in effect in 2012. It also directs 18 percent of its income and estate tax cuts to the richest one percent of Americans — and directs an identical 18 percent of the tax cuts to the poorest 60 percent of Americans.

These are some of the findings of two reports from Citizens for Tax Justice. One examines the revenue impacts of the fiscal cliff deal and explains why the White House claims the bill saves $620 billion over ten years even while it is official estimated to reduce revenue by $3.9 trillion over ten years. The report also explains that the law includes a package of provisions known as the “extenders” because they extend several special-interest tax breaks for two years, and that these provisions are likely to be extended again in the future and eventually offset the revenue saved from allowing high-income tax cuts to expire.

The second CTJ report examines the distributional effects of the law. It finds that while the law will give the middle fifth of Americans an average tax cut of $880 this year, which is equal to 2.0 percent of their income. At the same time, the law will give the richest one percent of Americans an average tax cut of $34,190, equal to 2.3 percent of their income.

Read the two reports:

Revenue Impacts of the Fiscal Cliff Deal

Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal

Also see CTJ’s New Year’s Day report:

The Biden-McConnell Tax Deal Would Save Less than Half as Much Revenue as President Obama's Original Tax Proposal



A Tax Cut By Any Other Name



| | Bookmark and Share

Former President George W. Bush mused recently that if the tax cuts he signed in 2001 and 2003 weren’t named after him, maybe more people would like them. But what’s to like about a package of tax policies that contributed trillions to our national debt and to the consolidation of wealth among an unsustainably small minority of American families?

Well, there’s not much more to like about the eleventh hour legislation just passed by Congress that enshrines the vast majority of those policies permanently in the federal tax code.

The American Taxpayer Relief Act, passed by the U.S. Senate and then the House hours before we all went back to business on January 2, 2013, has generated thousands of contradictory headlines. It’s a tax hike on the rich! A tax hike on the poor! The middle class is saved! The middle class is screwed!

One thing is sure: the U.S. Treasury is screwed. Had these 2001 and 2003 tax cuts – scheduled to expire after ten years because of their onerous cost, but extended for another two in 2010 – actually been wiped from the books, we would have been on the fast track to deficit reduction even without any spending cuts. But having preserved the vast majority of those low rates and loopholes, we’ll be hemorrhaging almost four trillion dollars over the next ten years.

When we first learned of the Senate deal taking shape on New Year’s Eve, we wrote:  

Today, several news reports indicate that the deal taking shape in Washington would raise less revenue than the President's December 17 proposal. There are reports that the threshold for higher income tax rates would be $400,000 for singles and $450,000 for married couples, and that this $450,000/$400,000 threshold would also apply to higher income tax rates on capital gains and dividends…. Congress should reject any deal that extends more of the Bush income tax cuts or Bush estate tax cuts than President Obama originally proposed to extend. America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely.

When the Senate passed legislation based on that deal, we ran the numbers and published our results on New Year’s Day, 2013, we concluded:

The tax deal negotiated between Vice President Joe Biden and Senate Minority Leader Mitch McConnell and approved by the Senate early on January 1 would save less than half as much revenue as President’s Obama’s original proposal…. The Biden-McConnell deal includes estate tax provisions that are much closer to the even more generous rules of 2011 and 2012 than the 2009 rules.

After a false start and dramatic reconvening, the U.S. House passed that Senate-approved legislation moments before midnight on New Year’s Day, and the President signed it on January 3rd.

Our full analysis of the legislation is contained in two new reports:

Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal

Revenue Impacts of the Fiscal Cliff Deal

The so-called Bush tax cuts that dominated fiscal debates for far too long are now history, and we may never speak of them again. But their legacy endures in our crippling deficit, and our growing economic inequality. And now, thanks to President Obama and the 112th Congress, they will continue to distort our tax system into the foreseeable future.



Extending Tax Cuts for Income Above S250,000 is Wrong Solution to Fiscal Cliff



| | Bookmark and Share

Since he first began running for President, Barack Obama has consistently proposed to extend almost four-fifths of the tax cuts first enacted under President George W. Bush, proposing to allow the expiration of just the one fifth of the tax cuts that go solely to the richest two percent of Americans. This was President Obama's proposal to extend the tax cuts for income up to $250,000 for married couples and up to $200,000 for singles (PDF). To extend any more of these tax cuts for the richest two percent of Americans is entirely unwarranted and fiscally irresponsible.

Our latest report estimates the revenue impact of the President's proposal to extend the Bush tax cuts for income up to $250,000/$200,000 and to reclaim a fraction of the lost revenue by limiting the savings from deductions and exclusions for high-income Americans. Compared to what would happen if Congress extends the Bush income tax cuts and makes no other changes, this would save $1.4 trillion. Compared to what would happen if Congress does nothing and lets the Bush tax cuts expire, this would lose $2.4 trillion.

That report also illustrates the impact of President Obama's recent proposal which became public on December 17, and which is the same except that the income threshold for higher tax rates on ordinary income would be raised from $250,000/$200,000 to $400,000. If the limit on deductions and exclusions is still included, this would save 85 percent as much revenue as the President’s original, $1.4 trillion proposal. If the limit on deductions and exclusions is not included, the report finds this would save just 49 percent as much as Obama’s original, $1.4 trillion proposal.

Today, several news reports indicate that the deal taking shape in Washington would raise less revenue than the President's December 17 proposal. There are reports that the threshold for higher income tax rates would be $400,000 for singles and $450,000 for married couples, and that this $450,000/$400,000 threshold would also apply to higher income tax rates on capital gains and dividends. (The President’s December 17 proposal would still have allowed higher rates to go into effect for capital gains and dividends for income in excess of $250,000/$200,000.)

Further, it is unclear whether or not any limit on deductions and exclusions is included in the deal taking shape now. This means that the proposal could save considerably less than half as much revenue as the President’s original, $1.4 trillion proposal.

In addition to this, lawmakers want to address the Bush-era estate tax cuts, which also expire tonight. The President has long proposed to make permanent the estate tax cuts that were in effect for one year, in 2009. CTJ has criticized this proposal because it asks only a tiny fraction of the wealthy to pay any estate tax. (CTJ’s figures show that only 0.3 percent of deaths in 2009 resulted in federal estate tax liability.)  There are reports that the deal taking shape would extend an even larger estate tax cut, one much closer to the estate tax cut that was in effect for 2011 and 2012.

CTJ’s most recent reports on other components of the New Year’s Eve tax deal taking shape are online at:

Capital Gains and Dividends
Alternative Minimum Tax (AMT)
EITC and Child Tax Credit
State-by-State figures on Bush tax cuts

Congress should reject any deal that extends more of the Bush income tax cuts or Bush estate tax cuts than President Obama originally proposed to extend. America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely. This would merely allow the tax rules to revert to those in place at the end of the Clinton administration. Given the economic prosperity experienced at the of the Clinton years, it’s difficult to believe that this more fiscally responsible approach will have a significant adverse effect on our economy. Of course, Congress should act to stimulate the economy so that the private sector creates more jobs, but almost any measure would be more effective in accomplishing this goal than extending more of the disastrous Bush tax cuts for the rich.



New Report: Comparing Speaker Boehner's "Plan B" Tax Proposal and President Obama's Latest Proposal



| | Bookmark and Share

A new report from Citizens for Tax Justice finds that the “Plan B” tax proposal that House Speaker John Boehner plans to put to a vote in the House of Representatives would allow the richest one percent of Americans to pay $36,000 less in federal income taxes, on average, than they would pay under President Obama’s most recent proposal. 

Under Plan B, the poorest three-fifths of Americans would pay more in federal income taxes, on average, than they would pay under the President’s latest plan.

Read the report

The latest tax proposals from Speaker Boehner and President Obama show that their respective positions on taxes have moved very slightly towards each other.

President Obama’s major proposals for the personal income tax would have, in their original version, saved $1.4 trillion compared to what would happen if Congress extended the Bush tax cuts and made no other changes to the tax code. As illustrated in the table on the following page, the President’s latest proposal, which became public December 17, would save 85 percent of that amount. Meanwhile, Speaker Boehner’s Plan B would save 24 percent of that amount.

Compared to current law (compared to what would happen if Congress does nothing), both of these proposals would lose trillions of dollars over the next decade.



Join George Soros, Abigail Disney and Jimmy Carter in Calling for a Strong Estate Tax



| | Bookmark and Share

United for a Fair Economy (UFE) invites everyone who supports fair taxes to join a petition to Congress to enact a robust estate tax.

The petition drive was launched on Tuesday as UFE’s Responsible Wealth project convened a group of well-known policy and political luminaries supporting a stronger estate tax and billionaires who believe that their estates should be taxed upon their deaths. The group includes George Soros, Abigail Disney, Robert Rubin, President Jimmy Carter and others.

Richard Rockefeller (one of the Rockefellers) spoke about how public investments funded by taxes will improve the quality of life for his heirs in a way that his own money alone cannot.

"If the world I leave behind is one of gated communities, growing inequality and misery among the have-nots, downward mobility for the middle class, a degraded environment and a rotting social and physical infrastructure -- then [my children's] inheritance will be a shabby one -- no matter how much money they get.”

The bill approved by Senate Democrats over the summer to extend most, but not all, of the Bush income tax cuts did not address the Bush estate tax cuts, which also expire at the end of this year. This is apparently because Senate Democrats themselves could not agree on how robust the estate tax should be.

The Bush tax cuts included the gradual reduction and eventual repeal (in 2010) of the estate tax. The “compromise” that President Obama signed that extended the Bush income tax cuts through 2012 does not repeal the estate tax altogether, but does set it at very low levels. Republicans and some Democrats in Congress want to extend these current rules, which exempt $5 million of an estate’s value per person, meaning a married couple can leave at least $10 million behind without triggering any estate tax. The taxable part of an estate is then taxed at a rate of 35 percent.

President Obama and many Democrats want to bring back the estate tax rules that were in place, for one year, in 2009, which exempted $3.5 million of an estate’s value per person (meaning $7 million for a married couple) and taxed the taxable part of an estate at 45 percent.

Citizens for Tax Justice has pointed out that even President Obama’s proposal (to reinstate the 2009 estate tax rules) would only tax an absurdly small number of estates. A 2011 report from CTJ shows that just 0.3 percent of deaths in 2009 resulted in estate tax liability. (The report also has figures for each state.)

The UFE petition recognizes this and calls for an estate tax that is more robust than what President Obama proposes, one that exempts $2 million of an estate’s value per person. The taxable part of an estate would be taxed at progressive rates, starting at 45 percent.



New York Times Asks How Obama Plan Really Affects the Top Two Percent



| | Bookmark and Share

A story in this week’s New York Times uses CTJ numbers to demonstrate what CTJ has said many times: President Obama’s proposal is not the confiscatory tax plan opponents would have you believe.

We have pointed out that taxpayers earning just over $250,000 really don’t have to worry because the President’s plan would barely affect them.  “A married couple whose income is exactly $250,000 would see no change in their income taxes under Obama’s plan,” we explained.

As the New York Times puts it,  “A close look at the president’s plan shows that a large majority of families making up to $300,000 — as well as hundreds of thousands of families with even larger incomes — would not pay taxes at a higher marginal rate…. [T]hey are the beneficiaries of choices the administration has made to ensure that families earning less than $250,000 do not pay higher rates.”

According to the Times, in crafting the plan, Obama’s team assumed high-income families take $20,000 in deductions, even though most families in this income range take a much larger amount, further driving down their taxable income. The Obama team also indexes the $250,000 and $200,000 thresholds for inflation from 2009, when the proposal was first formally put forward. This means families in 2013 could have considerably more than $250,000 in income without losing any part of the Bush income tax cuts under Obama’s approach.

“They wanted to be able to say that ‘Absolutely nobody making less than $250,000 could possibly pay higher taxes under our plan,’” said Robert S. McIntyre, the director of Citizens for Tax Justice, a liberal advocacy group. “So they had to assume the most ridiculous assumptions, that even if you’re a childless couple with no itemized deductions making $250,001, your taxes still won’t go up. They figured that if this couple existed and their taxes went up, somebody would find them and jump on ’em.”

You can view the graphics here.

In the end, the Times reports that if the President’s plan to allow the Bush tax cuts to expire on the top two percent is implemented, only about 32 percent of families with income from $250,000 to $300,000 would lose part of their income tax cuts. About 77 percent of families with income of $300,000 to $350,000 would lose tax cuts, and almost 99 percent of families with incomes above one million would lose some of theirs.

A related story in the Boston Globe uses other new CTJ numbers to show that, by contrast, one of the Republican plans to cap deductions without raising rates would have the inverse effect; it would “exact a bigger toll on upper- to high-income earners in the professional classes,” as opposed to the Mitt Romneys and Warren Buffetts.



No Dancing on Grover's Grave



| | Bookmark and Share

A cynic might think it’s a little bit of theater we’re witnessing, political pantomime deliberately staged to make Republicans look like they’ve gone all reasonable and are willing to raise taxes.  Others see this week’s headlines as the meticulously orchestrated end game in a 30-year strategy laid out by Grover Norquist and his Americans for Tax Reform.  More likely it’s just a rush among journalists to tell a big story: Republicans are renouncing their fealty to Grover’s no-tax pledge and are ready to support tax hikes.

The media loves a good story, and this one is the stuff of drama. An awkward little man who rose to power as leader of an anti-government movement faces sudden mutiny, with his followers peeling off and his authority in question. In this story, Grover Norquist is part spurned lover and part emperor with no clothes.

We’re not buying it. Much as we love the idea of Grover losing his clout and credibility, there’s no evidence his followers (mostly Republicans, a few Democrats) have changed their minds about taxes. Even when they make noises about abandoning the pledge and embracing new revenues, they are nonetheless hewing to Norquist’s two-part pledge. Just listen to a few who’ve been making news with their allegedly new-found freedom:

Senator Bob Corker:I’m not obligated on the pledge.  I made Tennesseans aware, I was just elected, the only thing I’m honoring is the oath I take when I serve, when I’m sworn in this January.” But, “[my] proposal includes pro-growth federal tax reform, which generates more static revenue… by capping federal deductions at $50,000 without raising tax rates.

Senator Lindsey Graham: “I agree with Grover — we shouldn’t raise rates — but I think Grover is wrong when it comes to we can’t cap deductions and buy down debt…. I will violate the pledge, long story short, for the good of the country, only if Democrats will do entitlement reform.

Senator Saxby Chambliss: "Times have changed significantly, and I care more about my country than I do about a 20-year-old pledge…. If we do it (Norquist's) way, then we'll continue in debt." But (he tweeted), “I’m not in favor of tax increases. I’m in favor of significant tax reform 2 lower tax rates & generate additional revenue through job growth.

Rep. John Boehner: “….[R]aising taxes on the so-called top two percent – half of those people are small-business owners that pay their taxes through their personal income tax filing every year. The goal here is to grow the economy and to cut spending.  We’re not going to grow the economy if we raise tax rates on the top two rates.And, “[w]e're willing to put revenue on the table as long as we're not raising rates.

Rep. Tom Cole:  “I think we ought to take the 98 percent deal right now. It doesn’t mean I agree with raising the top two. I don’t.And, “I signed that pledge; I'm honored to do it. I don't think in this case we would be breaking it by making what are temporary tax cuts permanent....I want to make all of them permanent, quite frankly.

None of these Republicans characterized as leading the mutiny against Grover’s no-tax pledge is getting anywhere near raising taxes, in both senses that the pledge mandates.  It is often forgotten that support for making all the Bush tax cuts permanent amounts to another rate cut because by law, those rates are scheduled to all go up on January 1, 2013.  They may cap a deduction here or there, but that will be outweighed by the generous Bush era rate cuts they (and to a large extent, the President) promise for 2013.  And that’s exactly what the pledge they’ve all signed spells out:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and
TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Increasingly, too, the Republican House leadership is demanding revenue cuts. Where are the President’s cuts? What are the Democrats’ plans for entitlement reform? This is what Speaker Boehner is tweeting several times a day. And his lieutenant, Eric Cantor, remains clear his party is opposed to tax rate increases.

An organization like Americans for Tax Reform doesn’t spend  upwards of $24 million in one election cycle if it’s not serious about getting its way, and Grover Norquist is a serious man.  As he told Politico just this week:

“I want pro-taxpayer candidates to survive and thrive….. My goal is to have the Democrats also all take the pledge…. I'm not planning on losing the tax debate we're having right now, but the tax issue will be more powerful in 2014 and '16 than today.  It gets more powerful.”

Let’s don’t kid ourselves or help the deep pocketed anti-tax lobbying machine peddle more myths.  It’s a testament to Norquist’s thirty-year effort that four years into an historic economic crisis, a couple of closed loopholes looks like a win for the good guys.  It’s not a win. Let’s view it instead as a chink in the armor, though – and redouble our own efforts.

Image of Norquist courtesy Liberaland.

An Oklahoma Congressman who chaired the National Republican Congressional Committee is the first person in Washington to speak clearly about the debate over the looming expiration of tax cuts first enacted under President George W. Bush.

Politico reports that Rep. Tom Cole of Oklahoma has argued to fellow Congressional Republicans that voting for President Obama’s proposal to extend the Bush income tax cuts for income up to $250,000 (up to $200,000 for unmarried taxpayers) is clearly a vote for cutting taxes, not raising them, and therefore does not violate a no-tax-increase pledge promoted by Grover Norquist’s organization and signed by most Republican lawmakers.

In other words, the President’s approach is a tax cut, just not quite as big of a tax cut (particularly for the rich) as the Republican Congressional leadership has advocated so far. This is illustrated in the graph below, which is from CTJ’s recent reports on the competing approaches to these expiring tax cuts.

 










 






This issue has been muddled by both Republicans and Democrats in Congress and in the White House. For example, President Obama often refers to his proposal to extend the tax cuts for income up to $250,000 or $200,000 as a way to “raise revenue.”

But Rep. Cole is correct because the Bush tax cuts are temporary tax cuts that are specifically written to expire at a certain date. Any extension of part of those tax cuts is a new tax cut that reduces revenue, and is “scored” by the Joint Committee on Taxation and the Congressional Budget Office as a revenue loss.

President Obama’s approach would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent of Americans. Rep. Cole is reported to argue that Congressional Republicans should settle right now for Obama’s proposal to extend the tax cuts entirely for 98 percent of Americans, before they expire, and debate the tax cuts for the richest two percent at a later date.

CTJ has long argued that President Obama’s proposal would extend far too many of the unaffordable Bush tax cuts, but Congress should enact his proposal for the short-term if it is the least irresponsible option being debated today. On the other hand, if anti-tax lawmakers in Congress refuse to follow Cole’s lead and instead block any tax bill that does not include an extension of all the tax cuts, then President Obama should simply allow all of the tax cuts to expire.

The logic used by most Congressional Republicans (not including Rep. Cole) is that allowing the expiration of a tax cut is the same thing as enacting a tax increase. But this logic is not applied consistently. While the Republican tax bills in the House and Senate would extend all the tax cuts first enacted under President Bush, they would allow the expiration of some expansions of the of the EITC and the Child Tax Credit that were first enacted under President Obama in 2009. That’s why the graph above shows that low- and middle-income groups would get slightly smaller average tax cuts under the approach of GOP Congressional leaders than they would get under Obama’s approach. (The difference is much more dramatic for the particular families affected.)

Somehow, followers of Grover Norquist don’t seem to consider the expiration of a tax cut to be a “tax increase” when only low- and middle-income people are affected. 



Extending Tax Cuts to Millionaires: Still a Terrible Idea



| | Bookmark and Share

President and Lawmakers Should Resist Proposals to Extend Income Tax Cuts for $1 Million of Income

The idea that Democrats and Republicans might “compromise” by extending the Bush income tax cuts for the first $1 million a taxpayer makes is back in the news, and it’s still a terrible idea.

Bill Kristol, editor of the right-ring Weekly Standard, said on Fox News that Congressional Republicans should be willing to give in on taxes, at least when it comes to higher taxes on millionaires. That set off chatter among some political observers and media outlets that perhaps there was a room for a “compromise” with Congressional Democrats, some of whom have called for extending the Bush tax cuts for income up to $1 million, rather than $250,000 for couples and $200,000 for singles as proposed by President Obama.

Here’s why the idea is absurd: Obama’s approach to the Bush tax cuts is already a huge compromise for the many lawmakers who originally opposed the Bush tax cuts. Remember, President Obama’s proposal is to extend 78 percent of the Bush tax cuts (in terms of revenue). His proposal would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent, and would extend much of the Bush estate tax cut so that only 0.3 percent of deaths would result in estate tax liability.

In May, House Minority Leader Nancy Pelosi floated the idea of extending the income tax cuts for up to $1 million of income. CTJ estimated that this would reduce the revenue savings from Obama’s approach to the income tax cuts by 43 percent. (This was later confirmed by the Joint Committee on Taxation.) We also found that people making over $1 million would get half of the additional tax cuts that would result from moving the threshold from $250,000/$200,000 to $1 million.

Married Couples Making $250k to $300k would Lose Just 2% of their Tax Cuts under Obama’s Approach. So Why Should We Extend Even More Tax Cuts?

People have asked us how extending the tax cuts for income up to $1 million could possibly help people who make over $1 million. The answer is that all of these proposals would extend reductions in income tax rates for all the income a taxpayer makes up to whatever threshold is being proposed. Obama’s proposal would extend the income tax cuts for the first $250,000 a married couple makes. That means that a married couple making $300,000 would only pay the higher, pre-Bush tax rates on $50,000 of their income (at most).

Similarly, Pelosi’s proposal (which she subsequently backed away from) would extend the income tax cuts for the first $1 million a family makes. That means that a family making $1.1 million would pay the higher, pre-Bush tax rates on just $100,000 of their income (at most).

Many people, including those who write about these issues and enact tax laws, have failed to appreciate this. Much of the debate has revolved around whether or not people who make $250,000 should be considered “rich” if they live in higher-cost areas. This debate is utterly beside the point because someone making $250,000 would not have to give up any of their tax cuts under Obama’s proposal.

In fact, a CTJ study found that married couples making between $250,000 and $300,000 would lose just 2 percent of their Bush-era income tax cuts under President Obama’s proposal. People making up to half a million dollars would keep most of their tax cuts.

Congresswoman Nita Lowey of Westchester, NY, is one of the Democrats who have made noises about moving the threshold from $250,000 to $1 million. Her comments on the issue reflect this lack of understanding.

Earlier this year, she told the Star Gazette that “If you are making $200,000 and are a fireman and a teacher, you are not feeling too rich with all the property taxes and all your expenses. But when you are making over $1 million, you ought to pay your fair share so we can support basic services in our communities.”

Even if Rep. Lowey’s district is some Bizarro World where fire fighters and teachers make $200,000 a year, they would not lose any portion of the Bush tax cuts under President Obama’s approach. And they certainly are not going to be helped by extending the tax cuts for even higher levels of income.



How Would the End of the Bush Tax Cuts for the Rich Affect Jobs?



| | Bookmark and Share

There have been a lot of contradictory statements coming from Washington these days about how employment levels would be affected by President Obama’s proposal to allow the expiration of the Bush-era income tax rate reductions for the top two income tax brackets (only affecting income in excess of $250,000 for couples and $200,000 for singles). Republican House Speaker John Boehner continues to cite a discredited report claiming that 700,000 jobs will be lost, while several media outlets have recently reported that the Congressional Budget Office (CBO) found 200,000 jobs would be lost. Neither is right.

This is one of the confusing aspects of the debate over the so-called “fiscal cliff,” the term sometimes used to describe the point at which the Bush tax cuts are scheduled to expire, and some spending cuts are scheduled to take effect, at the end of this year.  

Boehner’s Bogus 700,000 Jobs Claim

Let’s start with the most outrageous claim — that of Speaker Boehner. Last week, we explained why his call to pursue tax reform along the model of the Tax Reform Act of 1986 was both disingenuous and not up to the task of addressing our current budget situation. During the same speech, Boehner mentioned an Ernst & Young report finding that “going over part of the ‘fiscal cliff’ and raising taxes on the top two rates would cost our economy more than 700,000 jobs.”

Citizens for Tax Justice explained, back in July, why the study Boehner cites (which was paid for by groups like the U.S. Chamber of Commerce and the National Federation of Independent Businesses) is bogus. To take just one example of the problems with the report, it assumes a labor supply response (the degree to which people work fewer hours in response to higher tax rates) that is nearly 10 times stronger than the non-partisan CBO assumes when it makes similar estimates on labor supply effects.

CBO’s Misunderstood 200,000 Jobs Figure

The most recent CBO estimates, which are claimed to show a potential loss of 200,000 jobs, are another story. One problem is that the CBO study examines the impact of delaying, for two years, the expiration of the Bush tax cuts (and some reductions in spending) which will occur under current law. One of CBO’s findings is that extending the income tax rate reductions for the top two tax brackets (the tax cuts for the rich that Obama would like to see expire) for two years will result in 200,000 more jobs than would exist if Congress allowed these tax cuts to expire.

But if Congress decides to delay the expiration of the Bush tax cuts for the rich for two years (or any amount of time), chances are extremely high that this delay will eventually become permanent rather than temporary. If President Obama caves to Republican demands to extend tax cuts for the rich now, when he seems to have a mandate from the voters to let them expire, why in the world would he do any better in the years to come?

And, permanently extending the Bush tax cuts for the rich, as Republican Congressional leaders ultimately want, would have negative long-term impacts because it would substantially increase the budget deficit and make it more difficult to make the investments that create jobs.

This is demonstrated by other CBO studies that examine the long-term impact of removing all the impacts of the so-called “fiscal cliff” permanently. A CBO report from August shows (in a table on page 37) that removing all the fiscal cliff impacts (by making the Bush tax cuts permanent and canceling the scheduled spending cuts) would reduce economic output (and thus jobs) by 2022. Gross domestic product would be down 0.4 percent and gross national product would be down 1.7 percent, compared to what would happen if Congress did nothing and simply allowed the fiscal cliff impacts to take effect. (And remember, two-thirds of the fiscal cliff’s impact on deficit reduction results from the expiration of tax cuts, rather than then spending cuts scheduled to take effect.)

Of course, the short-term does matter — we need to improve the economy right now! But even if we could be persuaded that extending the income tax cuts for income in excess of $250,000 could save 200,000 jobs in the short-term, we could think of many, many, more cost-effective ways to do this. The figures in the new CBO report show (in a table on page 7) that the cost difference between extending all the Bush tax cuts and extending all but the income tax cuts for the top two brackets would be $42 billion in 2013. Divided by 200,000, that comes to $210,000 per job saved.

In other words, CBO thinks we can save a job for every $210,000 that we give to people who make over $250,000 (or $200,000 for single taxpayers). We’re not sure how much it costs annually to help public schools hire back teachers laid off due to budget cuts, or to hire construction workers to build bridges, but we’re pretty sure it’s less than $210,000 each.

Actually, the same CBO report also shows that the cost of calling off the automatic cuts in defense and non-defense spending and the scheduled expiration of increased doctor payments from Medicare would be $64 billion by the end of 2013 and would make a difference of 800,000 jobs. Divide $64 billion by 800,000 and that comes to $80,000 per job saved. That sounds like a much better deal.

Enact Obama’s Proposal or Go Off the Fiscal Cliff

The biggest issue facing Congress right now is finding revenue to make the public investments that will help our economy and to reduce the deficit. Extending most of the Bush tax cuts, as President Obama proposes, is not a great way to achieve that, but it makes sense to enact Obama’s approach for one year to give lawmakers time to find better solutions. If anti-tax lawmakers block that approach and insist on enacting all the tax cuts, then Congress and the President should simply allow all the tax cuts to expire.



Boehner's Fake Offer of Compromise on Taxes



| | Bookmark and Share

Speaker Boehner Uses Different Words to Repeat Unchanged Opposition to Giving Up Tax Cuts for the Rich

On Wednesday, Republican House Speaker John Boehner repeated his stance that his caucus would not approve any increase in tax revenue except for a revenue boost driven by economic growth that they claim will result from the sort of tax overhaul proposed by Mitt Romney.

Boehner attempted to present this position as a compromise, saying his caucus is “willing to accept some additional revenues” but then went on to say, “There’s a model for tax reform that supports economic growth. It happened in 1986 with a Democrat House run by Tip O’Neill, and a Republican President named Ronald Reagan.”

The Tax Reform Act of 1986 was projected by Congress’s official revenue-estimators to be “revenue-neutral.” The law ended many tax loopholes and special breaks, but used the revenue saved to offset reductions in rates, just as Mitt Romney claimed (but failed to demonstrate) his plan would do.

Nonetheless, Boehner argued that this sort of tax reform improves the economy so much that the resulting increased incomes lead to increases in the amount of tax revenue collected. He said that by “creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy. A stronger economy means more revenue, which is what the President seeks.”

But the projections of revenue-neutrality in 1986 were correct. Several studies on the impacts of the 1986 reform were done by economists on all sides of the tax issue in the 1990s, and none found evidence that it expanded the entire economy in a way that would boost revenue as Boehner claims.

The 1986 reform did a lot of good, but it was revenue-neutral and it was very different from what Republicans have been talking about today. The 1986 reform enhanced fairness by ending tax breaks for investment income that allowed wealthy investors to pay lower effective tax rates than middle-income people, and these reforms were sustained for several years before these breaks were brought back into the tax code. But Congressional Republicans want to expand those breaks or at least make permanent the Bush-era provisions that expanded them (the 15 percent special top rate for capital gains and stock dividends).

The 1986 reform also made U.S. corporations collectively pay higher taxes, by closing loopholes and cracking down on offshore profit-shifting, largely by curbing “deferral” on taxes on U.S. profits that companies artificially shifted to tax havens (reforms that have largely been eroded since then). Higher corporate taxes made it possible to reduce personal income tax rates, while keeping some popular and useful personal tax deductions and credits. But Congressional Republicans, and sadly even President Obama, propose that the corporate part of tax reform should, by itself, be revenue-neutral (if not revenue-negative).

Curbing unwarranted tax breaks, as happened in 1986, is an excellent idea. But the revenues from such reforms should be used to make public investments or cut the deficit, not reduce tax rates. In fact, the highest priority of tax reform should be raising revenue — real revenue, not the voodoo-economics sort of revenue gains that Boehner mistakenly claims will come from tax-rate reductions.

Most people forget that President Reagan actually increased taxes substantially (and repeatedly) after his 1981 tax reductions failed to achieve the economic goals he had been told to expect by his “supply-side” advisers (whom Reagan fired). Congressional Republicans, who say they admire Reagan, should emulate his responsible later policies, rather than try to repeat his early (and admitted) mistakes.



Top Ten Tax Moments from the VP Debate



| | Bookmark and Share

The first and only Vice Presidential Debate of the election season between Vice President Joe Biden and Wisconsin Congressman Paul Ryan featured a spirited discussion over their competing visions for tax policy. While watching, we began to genuinely wonder if Biden had spent time reading Citizens for Tax Justice (CTJ) materials considering that time and again he made precisely the points CTJ has been making for years. Ryan, on the other hand, repeatedly misrepresented the tax system and the two tickets’ tax plans.

Below we breakdown the most important tax policy moments in the debate:

1. Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts

While the presidential candidates largely ignored the Bush tax cuts in their debate last week, Biden put them front and center during the VP debate when he pointed out that Romney and Ryan are proposing the “the continuation of a tax cut that will give an additional $500 billion in tax cuts to 120,000 families” over the next ten years, compared to the Obama Administration plan for the Bush tax cuts.

Biden’s formulation here is a little confusing but not incorrect. Of course, President Obama proposes to allow the Bush income tax cuts to expire for income in excess of $250,000 for couples and in excess of $200,000 for singles, and only 2 percent of taxpayers would lose any portion of their Bush income tax cuts under this approach. The administration has stated that this would cost $849 billion less, over ten years, than extending the Bush income tax cuts for all income levels, while our own estimate is that it would cost $887 billion less over ten years. Pretty close.

Biden is focusing specifically on the part of this figure that would benefit the richest 120,000 families, apparently based on figures from the Tax Policy Center. Our own calculations essentially back up Biden’s point. We estimate that the richest taxpayers with incomes exceeding $2 million in 2013 (the richest 135,000 families in 2013) would receive about 57 percent of the income tax cuts that would otherwise expire under Obama’s approach, which comes out to $507 billion over ten years.

2. Ryan Promises the Mathematically Impossible

In defending Romney’s tax plan, Ryan reiterated their ticket’s commitment to “lower tax rates across the board” and to “close loopholes,” while simultaneously sticking to the “bottom lines” of not raising the deficit, not increasing taxes on the middle class or lowering the share of income that is borne by high-income earners. But Ryan is defending a plan that CTJ has found is mathematically impossible. Even if Romney and Ryan eliminated all the tax expenditures for wealthy taxpayers that they have put on the table, our analysis has found that their across-the-board tax cuts would still require them to give an average tax break of $250,000 to individuals making over $1 million, which would violate their pledge not to lower the share of taxes borne by high-income earners.

Ryan said during the debate that there are six studies showing that their plan is possible, but Biden correctly pointed out that even the studies Ryan cites conclude that the plan would require increasing taxes on taxpayers who do not have particularly high incomes.

3. Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table

One of the major reasons that the Romney campaign’s tax plan would be incapable of eliminating enough tax expenditures to add up is that Romney has specifically said that he would keep the tax breaks for capital gains and stock dividends. During the debate, Biden noted that this shows the lack of seriousness in Romney’s loophole-targeting approach because Romney has exempted the “biggest loophole” of all - the “capital gains loophole.”  As CTJ pointed out in a recent report, ending the capital gains tax preference would tremendously improve fairness, raise revenue, and simplify the tax code in one fell swoop. 

4. Ryan and Biden Dispute the Definition of Small Businesses

Repeating Romney’s line on small businesses from the first presidential debate, Ryan claimed that Obama is going to raise taxes on small businesses and kill 710,000 jobs by doing so. The reality, however, is that only the 3 to 5 percent richest business owners (individuals who could hardly be called “small business” owners) would lose any of their tax breaks, and the job loss claims are complete malarkey.

5. Biden Takes on Romney and Ryan’s Commitment to Grover Norquist

During the first presidential debate, Romney reiterated his pledge to not raise a single penny in revenue, even if the revenue was raised as part of a deal that included $10 in spending cuts for every $1 in revenue increases. Biden took issue with this commitment saying that “instead of signing pledges to Grover Norquist not to ask the wealthiest among us to contribute to bring back the middle class, they should be signing a pledge saying to the middle class we're going to level the playing field.”

Biden is absolutely right that we need to reject the extreme anti-tax approach taken by individuals like Grover Norquist and instead embrace a balanced approach to deficit reduction. The question for Romney is when he will recognize that a balanced approach is not only what the American people want, but also what business experts support as well.

6. Ryan Misrepresents History of 1986 Tax Reform

Responding to the question of what specific loopholes he and Romney are proposing to close, Ryan attempted to dodge the question by arguing that they should not lay out specific loopholes they want to close because doing so would prevent them from following the model that allowed Ronald Reagan and Tip O’Neill to produce the 1986 tax reform. The reality, however, as recounted by CTJ Director Bob McIntyre – whose work was integral to the passage of the 1986 reform – is that Reagan’s Treasury Department released a detailed tax reform plan explicitly laying out exactly which tax expenditures the Administration would like to see closed. In other words, the 1986 tax reform experience actually proves the opposite of what Ryan is saying about vagueness being some kind of asset.

7. Biden Revives Romney’s 47% Remark

Continuing his efforts to upend tax myths during the debate, Biden took issue with Romney’s earlier statement that 47 percent of Americans aren’t paying their fair share, and he noted that many middle income people actually “pay more effective tax than Governor Romney in his federal income tax.” Biden was right to push back against the notion that any Americans are not contributing their fair share since, on average, any American’s share of total taxes is already roughly equal to their share of total income. In addition, CTJ has found that individuals making around $60,000 do in fact pay an effective federal tax rate of 21.3% on average, which is a lot compared to Romney’s tax rate of 14% in 2011.

8. Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes

During the debate, Ryan asserted, “Of the 21 tax increases in Obamacare, 12 of them hit the middle class.” The reality, according to a CTJ analysis, is that 95 percent of the tax increases included in the healthcare reform legislation would be borne by either companies or households making over $250,000. Adding to this, Ryan’s specific point about the 12 tax provisions is mostly false because 4 of the 12 provisions are not really taxes at all.

9. Biden Stumbles on the Primary Cause of Great Recession

The only significant tax policy stumble for Biden came when he argued that Ryan helped create the Great Recession by “voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy.” The problem of course is that the Great Recession was due primarily to a financial crisis, not some sudden crisis in government spending and deficits.

While extraordinary increases in deficit spending and tax cuts for the rich during President George W. Bush’s presidency, (which Ryan did vote for), did not cause the recession, they certainly caused an explosion in the national debt. In fact, if continued, the Bush tax cuts and the cost of the wars will account for nearly half of the public debt by 2019.

10. Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich

In an attempt to discredit the idea that allowing the Bush tax cuts to expire for the wealthiest Americans will help fix the deficit, Ryan argued that “if you taxed every person and successful business making over $250,000 at 100 percent, it would only run the government for 98 days.” To start, the entire premise of this argument is bogus because the Obama administration is not proposing a revenue-only approach to deficit reduction; in fact it has already signed into law over $2 trillion in spending cuts. In addition, Ryan ironically failed to discern, even by his own calculations, that 98 days worth of government spending would be more than enough to close the projected budget deficits and would be more than enough to pay down the national debt in the coming years.



Debate Debrief: Romney and Obama Compare Tax Policies



| | Bookmark and Share

During the first presidential debate of this election season, President Barack Obama and former Governor Mitt Romney’s discussion focused primarily on what is arguably the most important issue of this election: tax policy. Over half of the debate was spent on the intricacies of tax policy, from the treatment of small businesses to the precise revenue cost of trillions of dollars in proposed tax cuts.  Here we offer some criticism and context.

Size of the Candidates’ Tax Cut Plans

Early in the debate Obama explained that Romney’s “central economic plan calls for a $5 trillion tax cut – on top of the extension of the Bush tax cuts.” Romney denied this, saying “I don’t have a $5 trillion cut. I don’t have a tax cut of the scale that you’re talking about.” Romney added that his plan would not “reduce the share of taxes paid by high-income people” and that it would “provide tax relief to people in the middle class.”

The truth is that Romney isn’t proposing a $5 trillion tax cut, he’s proposing to cut taxes by over $10 trillion over ten years. Romney proposes new tax cuts costing around $500 billion a year (according to the Tax Policy Center) on top of making permanent all the Bush tax cuts, which by themselves would cost $5.3 trillion over a decade.

Romney is proposing to make up some of the $5 trillion in additional tax cuts by closing loopholes, eliminating deductions and other tax expenditures, but he has kept his plan secret so far and has refused to name even a single tax expenditure he would eliminate or loophole he’d close.

An analysis by Citizens for Tax Justice found that even if millionaires were forced to give up all the tax expenditures that Romney has put on the table, his tax plan would still give a tax break of at least $250,000 on average for individuals making over $1 million. That is, he simply cannot back up his assertion that he is “not going to reduce the share of taxes paid by high- income people.” And if he really is going to make up the revenues we’ll lose to his rate cuts, taxes would have to go up for other taxpayers.

Throughout the debate, Romney referred to several studies showing that his plan is mathematically possible (a low standard to meet to be sure), but the reality is that the studies he’s referring to aren’t all actual studies, nor do they fully support his plan.

It’s important to note that while Romney’s tax plan is the height of fiscal irresponsibility, Obama himself is proposing to extend most of the Bush tax cuts, at a cost of $4.2 trillion over the next ten years. The President assured the audience that he wants to “continue the tax rates - the tax cuts that we put into place for small businesses and families.  But,” he continued, “for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president,” that is, the pre-Bush tax cuts rate.

CTJ has analyzed Obama’s plan and found that extending 78 percent of the Bush tax cuts will lose far too much revenue in the long run. The President’s plan would extend the tax cuts for the first $250,000 a married couple makes. We also found that married couples making between $250,000 and $300,000 would still continue to enjoy, on average, 98 percent of the Bush tax cuts. Fewer than two percent of taxpayers would lose any part of the Bush tax cuts under Obama’s plan, so it’s hardly a bold proposal for reducing the deficit and restoring urgently needed revenues.

In other words, neither presidential candidate showed on Wednesday night that they have fully come to terms with the fact that the United States cannot afford continuing to hand out trillions of dollars in tax cuts.

Long Term Deficit Reduction Plans

At a Republican presidential debate over a year ago, Romney joined with all the other candidates in saying that they would reject any deal that raised tax revenues, even one that would include $10 in spending cuts for every $1 in additional tax revenue – ten times more in crippling spending cuts than tax increases. When pushed by the moderator during Wednesday’s presidential debate, Romney stood firm, saying that he had “absolutely” ruled out the possibility of raising additional revenue to reduce the deficit.

The Simpson-Bowles Commission plan to balance the budget, which Romney praised last night, however, requires a ratio of $1 in spending cuts to $1 in revenue increases (compared to the budget baseline that Obama and many members of Congress use). Ironically, by seemingly embracing Simpson-Bowles, Romney put himself to the left of Obama, whose own long term deficit reduction plan actually cuts fewer taxes and less spending than Simpson-Bowles. As Obama explained in the debate: “the way we do it is $2.50 for every cut, we ask for a dollar of additional revenue.”  (And he repeatedly points out, of course, that his health care legislation will slow the deficit’s growth by reducing Medicare costs.)

Neither candidate is acknowledging the elephant in the room. In the long-run, what they really have to do to fix the budget deficit is just to stop extending most or all of the Bush tax cuts, or find a way to pay for those parts they do extend.



Tim Kaine Lurches Right in Quest for "Middle Ground"



| | Bookmark and Share

Former Virginia Governor and current Senate candidate Tim Kaine found himself in hot water after a Senatorial debate last week in which he expressed a willingness to consider “a proposal that would have some minimum tax level for everyone.” Perhaps even worse, Kaine has also proposed a so-called “Middle-Ground” approach to the Bush tax cuts, which he says in his TV ad is fiscally responsible. His middle ground position – putting him between a tax-averse Democratic president and a tax-loathing Republican rival – would extend the Bush tax cuts for the first $500,000 that a taxpayer makes in a year.

His fiscally irresponsible ideas about the expiring Bush tax cuts merit their own outrage. Kaine’s proposal to raise the income threshold above which the Bush tax cuts expire to $500,000 would save 22 percent less revenue than Obama’s $250,000 threshold, and 73 percent of the lost revenue would be paying for tax cuts for people making over $500,000.  A full 30 percent of the cost of Kaine’s extra tax cuts would go to people making over $1 million!

It’s not surprising that his statements regarding a minimum tax have caused an uproar considering that such proposals are usually the province of radical conservatives like Minnesota Republican Michelle Bachman, rather than that of moderate Democrats. Ironically, Kaine himself made a strong case against such a proposal in the debate when he noted that “everyone pays taxes,” a point Citizens for Tax Justice repeatedly makes.

What’s so disturbing about Kaine’s Bush tax cut proposal, as opposed to his openness to a minimum tax (which he’s already walked back), is that it isn’t out of the realm of possibility. Last May, Democratic House Minority Leader Nancy Pelosi proposed to raise the income threshold over which the Bush tax cuts should expire even higher, from $250,000 to $1 million. Kaine and like-minded Democrats need to reconsider their position because allowing even more of the Bush tax cuts to stay in place makes about zero fiscal sense.

Front Page Photo of Tim Kaine via Third Way Creative Commons Attribution License 2.0



Tax Ideas in the Democratic Platform: Obama as Tax-Cutter-In-Chief



| | Bookmark and Share

In its 2012 Platform, the Democratic Party broadly calls for a tax system that asks “the wealthiest and corporations to pay their fair share,” while also taking “decisive steps to restore fiscal responsibility.” The actual policy proposals called for in the platform, however, are wholly inadequate to achieve either tax fairness or fiscal sustainability.

The Bush Tax Cuts

The most important platform plank on the individual side of the tax system is the call to allow the “Bush tax cuts for the wealthiest to expire,” which reflects President Obama’s proposal to allow the Bush tax cuts to expire for income over $250,000. Under the president’s proposal, 98.1% of Americans would continue receiving the entirety of their Bush tax cuts. It’s important to note that while the wealthiest Americans would lose part of their tax cuts under President Obama’s proposal, they would still receive generous tax breaks because any income up to $250,000 (or $200,000 for singles) would continue to be taxed at the low, Bush tax cut rates. As a result, the wealthiest 1%, for example, would get an average tax break of $20,130 in 2013.

It is also important to note that even this partial extension of the Bush tax cuts the president proposes would increase the deficit by an astounding $4.2 trillion over the next decade. To be sure, President Obama’s plan is much more fiscally responsible than a full extension of the Bush tax cuts, which would increase the deficit by $5.4 trillion. But fiscal responsibility will eventually require something bolder than simply extending most of the tax cuts that are responsible for most of the deficit.

Corporate Tax Reform

Turning to corporate taxes, the Democratic platform follows the misguided “Framework for Corporate Tax Reform,” introduced by President Obama earlier this year, which proposes to use the closure of corporate tax loopholes to pay for lower corporate tax rates. It also proposes an expansion of the research and manufacturing tax credits. What this framework gets right is a call to end the egregious loopholes and tax breaks that allow major corporations to pay an average effective tax rate of half the statutory rate, with many corporations paying nothing at all.

The problem is that instead of using the revenue raised by eliminating tax loopholes and breaks to fund desperately needed government investments and reduce the deficit, the Democratic platform, like the president’s framework, squanders the revenue on lower corporate tax rates and/or additional wasteful tax breaks. In other words, this kind of “revenue-neutral” corporate tax reform is not what the US needs; instead, we need revenue-positive reform.

Stuck in the Anti-Tax Mindset

The Democratic Party 2012 platform reveals a party deeply committed to the anti-tax mindset that historically is associated with the Republican Party. Rather than laying out the cold, hard truth about how the US needs to raise a substantial amount of revenue to meet its commitment to future generations, the Democratic platform seems an attempt to one–up Republicans on the virtues of tax cutting by touting the wide variety of cuts Democrats already enacted, and the massive amount they plan to extend. Given the enormous need for revenue to fund public investments and eventually reduce the deficit, a record of tax-cutting should be a source of embarrassment rather than pride or celebration.



On Taxes, Romney Projects onto His Opponent



| | Bookmark and Share

“Unlike President Obama, I will not raise taxes on the middle class,” Republican presidential candidate Mitt Romney said during his acceptance speech. It was a startling statement because it describes one of the facts about Romney’s own tax plan and attributes it to the policies of his opponent, President Obama.

Romney’s Tax Plan: Breaks for the Rich No Matter How You Look at It, Leaving the Bill for Low- and Middle-Income Americans

A recent CTJ report shows that the basics of Romney’s tax plan would give out huge tax cuts to those who make between half a million and one million dollars and those who make over a million dollars, no matter how the missing details are filled in. Romney cannot possibly meet his goal of offsetting the costs of the tax cuts (besides the enormous Bush tax cuts, which he doesn’t think need to be paid for) without raising taxes on people farther down on the income ladder.

The CTJ report finds that Romney’s proposed tax cuts would reduce taxes by an average $80,000 for people who make between half a million and one million dollars and by an average $400,000 for people who make over a million dollars.

Now, Romney promises to offset the cost of these tax cuts (aside from the enormous Bush tax cuts, which he would make permanent) by reducing or eliminating “tax expenditures,” which are the credits, deductions, exclusions and loopholes that lower people’s tax bills. But even if Romney made the very rich give up all the tax expenditures that he has put on the table, they’d still be getting huge tax cuts —  an average $48,000 for people who make between half a million and one million dollars, and an average $250,000 for people who make over a million dollars.[1]

If Romney’s plan is going to be revenue-neutral (not counting the huge cost of the Bush tax cuts) as he claims, then someone is going to have to pay higher taxes than they do now so that the people who make over half a million dollars a year can pay less. The loss of tax expenditures for low- and middle-income people can be larger than the benefits they receive from Romney’s rate reductions and other proposed breaks, meaning they face a net tax increase. In fact, this must happen for Romney to keep his promise about not losing more revenue, as the Tax Policy Center has already pointed out.

Obama’s Problem Is that He’s Cut Taxes Too Much, Not that He Raised Taxes

Romney’s claim that Obama has raised taxes on the middle-class is initially hard to understand, given Obama’s two-year extension of all the Bush tax cuts and his call to again extend the Bush tax cuts entirely for 98 percent of Americans while letting them expire partially for the richest 2 percent of Americans. (In fact, we pointed out that many of the taxpayers within the richest 2 percent, like those with incomes just over $250,000, would only have to give up a tiny fraction of their tax cuts under Obama’s plan.)

Romney’s claim that Obama has raised taxes on the middle-class appears to refer to the new mandate to obtain health insurance, which the Chief Justice of the Supreme Court decided was actually a tax and therefore within the Constitutional powers of Congress.

As we pointed out at the time the Supreme Court ruled on the health care mandate, very few people would ever actually pay the “tax,” which is the fee that will be imposed on people who choose to go without health insurance. As we explained,

It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

An Urban Institute study found that fewer than 3 percent of households would be subject to the fee.

Another point that Romney and his allies seem to forget is that the 2009 economic recovery act that they criticize so much actually cut taxes for 98 percent of working families. (See the national and state-by-state estimates from CTJ.)  

If President Obama has made any mistakes on taxes, it’s that he has been entirely too willing to extend too many tax cuts for too many Americans at a time when we desperately need revenue.

 

 


[1] Notice we say that the $48,000 and $250,000 figures are the tax cuts these groups would get if they had to give up all the tax expenditures that Romney has put on the table. That’s because he has pledged to keep the tax expenditures that benefit the rich the most — breaks for investment, like the low rates for capital gains and stock dividends.

 



Don't Buy Into the Fiscal Cliff Hysteria



| | Bookmark and Share

The Congressional Budget Office’s (CBO) latest 10 year budget and economic projections set off yet another firestorm of dire headlines warning of a “deep recession” if Congress does nothing to address the so-called “fiscal cliff.” While such headlines create a sense of crisis, the real danger is not that Congress will do nothing, but rather that cynical members of Congress will use our struggling economy as an excuse to extend the reckless policies of the last 12 years.

One of the key points missing from the fiscal cliff debate is the fact that doing nothing would be rather beneficial over the long run. As Citizens for Tax Justice (CTJ) pointed out earlier this year, if Congress were to just sit on its hands and do nothing, this would solve the entirety of our long term fiscal gap and would even allow the US government to start paying down the national debt by 2015.

For better or worse, however, there’s good reason to believe that Congress will do something. As CTJ’s Director Bob McIntyre pointed out in a recent op-ed, the gap between Republicans and Democrats on how to deal with the fiscal cliff is actually relatively small considering that it’s over whether or not to extend 78% of the Bush tax cuts (as President Obama is proposing) or all of the Bush tax cuts (as congressional Republicans are proposing). Under either scenario (or somewhere in between) this would wipe out most of the fiscal cliff and prevent the country from slipping back into recession.

The critical problem, however, is that both approaches would dramatically increase the deficit over the coming years. According to CTJ estimates, President Obama’s proposal to extend most of the Bush tax cuts would increase the deficit by $4.2 trillion, while the Republican proposal to extend all of the Bush tax cuts would add $5.4 trillion to the deficit over the next 10 years. In other words, while both approaches would help the economy in the short term, they would put the US on the path to fiscal ruin.

What, then, is the best way to deal with the fiscal cliff? Lawmakers should focus on extending a responsible portion of the tax cuts that go to low and middle income families, while at the same time enacting temporary stimulus programs, such as infrastructure investments, putting teachers back to work and other programs that directly create jobs. (which are far more stimulative than extending the Bush tax cuts). This approach would have the double benefit of helping the struggling economy in the short term, while setting the US on the path of deficit reduction over the long term.



What the Tax Foundation Gets Wrong about the Bush Tax Cuts



| | Bookmark and Share

A widely tweeted report from the Tax Foundation claims that failure to enact the House Republican bill extending most of the expiring tax cuts would mean that Americans lose significant tax cuts — from an average $1,310 in Mississippi to an average $5,783 in Connecticut.

Here’s why the Tax Foundation report is highly misleading:

  1. The report discusses what will happen if the House GOP bill extending most expiring tax cuts is not enacted and all the tax cuts are allowed to expire, but fails to mention that President Obama’s approach would extend all tax cuts for 98 percent of taxpayers and partially extend them for the richest two percent of taxpayers.  If the scenario studied by the Tax Foundation report (the complete expiration of all the tax cuts) comes to pass, it will be because the House of Representatives refused to approve the President’s approach, which has already passed the Senate.

  2. While the House GOP bill would extend more tax cuts for 2.7 million high earners (the richest two percent of taxpayers), it would allow the expiration of certain tax breaks for 13 million working families with 26 million children. These are the 2009 provisions expanding the EITC and Child Tax Credit, provisions that would be extended under the approach taken by President Obama and Senate Democrats. This is why our national report and our state-specific reports show that most income groups besides the rich would, on average, pay more in taxes under the GOP approach than under Obama’s approach.

  3. Even if the choice was between enacting the House GOP bill and allowing all the tax cuts to expire, the Tax Foundation report would be misleading because the average tax break for an entire state does not represent the tax break most taxpayers in that state would see. Any calculation of the average tax cuts under the House GOP bill will be skewed by the enormous tax cuts that go to the very richest taxpayers, resulting in an average tax break that is far greater than the median tax break (the tax break going to the taxpayer who is right in the middle of the income distribution). For example, we estimate that in Connecticut, the richest state in the U.S., the average tax break under the GOP bill for all the state’s taxpayers would be $3,810, but the average tax break for the middle 20 percent of the state’s taxpayers would be $1,020.[1] (The report also shows that the average tax break for the middle 20 percent of taxpayers would be $20 larger under Obama’s approach.)

 

 


[1] Note our estimate that the House GOP bill would result in a tax break of $3,810 on average for Connecticut taxpayers, which is much smaller than the $5,783 estimated by the Tax Foundation. Part of the reason is that the Tax Foundation is including the full two years of AMT relief in the GOP bill, rather than one year. The report says that the House GOP bill would provide $403 billion of tax cuts, which is very close to the $405 billion figure at the bottom of this table from the Senate Finance Committee chairman’s website. The chairman’s table shows that the figures for the GOP approach clearly include a second year of AMT relief, which accounts for a fourth of that $405 billion total. Rightly or wrongly, both parties are committed to providing AMT relief each year until some sort of tax reform makes it unnecessary, so there is really no difference between the parties on this issue, even if the Democratic proposal up for debate right now only provides one year of AMT relief while the GOP proposal provides two years of AMT relief. In any event, it doesn’t make sense to estimate an average tax break including two years of AMT relief and then report that this amount is at stake “per year” as at least one media outlet has done.



New Reports with State-Specific Data on Bush Tax Cuts



| | Bookmark and Share

New reports from Americans for Tax Fairness, Citizens for Tax Justice and the National Women's Law Center demonstrate how public investments and taxpayers in each state would be affected by the competing approaches to the Bush tax cuts.

Americans for Tax Fairness is a coalition that includes Citizens for Tax Justice and other good government groups, think-tanks, small business associaitions and labor unions that have come together to raise awareness about the need for revenue to address the budget deficit and make vital public investments. We believe the first step is allowing the Bush tax cuts for the richest 2 percent of taxpayers to expire.

Read the State Reports from Americans for Tax Fairness



CTJ Statement on Passage of Senate Democrats' Tax Proposal



| | Bookmark and Share

Today, a majority of U.S. Senators voted for a proposal that would extend for one year the Bush-era income tax cuts, except for those tax cuts going solely to the richest 2 percent of taxpayers, and would also extend some 2009 provisions that expanded parts of these tax cuts benefiting low-income working families. A minority of Senators voted for a proposal that would extend all the Bush-era income tax cuts, including those solely benefiting the richest 2 percent, but that would allow the 2009 provisions for low-income working families to expire.

The following is a statement from Robert McIntyre, director of Citizens for Tax Justice:

“Both of the tax bills taken up today by the U.S. Senate would extend far too many tax breaks, including tax breaks for those with the highest incomes, and would make future deficit reduction even more difficult. But the bill modeled largely on the President’s tax proposal is certainly the fairer and more responsible of the two.

“Our estimates show that under the Senate Democrats’ bill, which is modeled on President Obama’s proposal to extend most of the expiring tax cuts, people with incomes up to half a million dollars would, on average, continue to enjoy most of the Bush-era income tax cuts they enjoy today. It is ridiculous that a large number of U.S. Senators believe that this bill would not provide sufficient tax breaks to high-income taxpayers, and therefore voted for the Republican bill to extend all the Bush-era income tax cuts.

“The Republican bill that would extend all the Bush-era income tax cuts also would allow the expiration of the 2009 provisions that expanded the Earned Income Tax Credit and the Child Tax Credit that benefit low- and moderate-income working families. The expiration of these 2009 provisions would mean that 13 million families with 26 million children would lose tax breaks, according to our estimates. Virtually all of these families have incomes under $50,000, and in most cases they earn far less.

“A proposal that provides larger tax breaks for the richest 2 percent of taxpayers while allowing the expiration of tax breaks for 26 million children living in low- and moderate income families is the epitome of upside-down priorities. It is unfortunate that the majority party in the House has already lined up behind this coddle-the-rich-at-the-expense-of-tens-of-millions-of-American-children approach.”



The Senate Votes on the Bush Tax Cuts: Reviewing the Numbers



| | Bookmark and Share

UPDATED July 26, 2012:
On Wednesday the Senate approved the Democrats' tax bill, modeled on President Obama's plan to extend most of the expiring tax cuts, and rejected the Republican alternative. (See CTJ's statement on the votes.)

The Republican proposal (S.3413) would extend all the Bush-era tax cuts but would allow more recent expansions of tax breaks for low-income families to expire. The Senate Democrats’ bill (S.3412) would implement most of President Obama’s proposal to extend the Bush tax cuts, except for certain provisions benefiting the rich, and to extend the more recent expansions of tax breaks for low-income families.

The Senate Democrats’ proposal would extend most of the Bush income tax cuts, but would allow the expiration of most of those income tax cuts going solely to the richest two percent of taxpayers — married couples making over $250,000 and singles making over $200,000. The Senate Democrats’ proposal would also extend some 2009 provisions that expanded certain parts of the Bush income tax cuts (related to the EITC and Child Tax Credit) that benefit low-income working families, while the Senate Republican proposal would allow these to expire.

A report published by CTJ last month compares how taxpayers in different income groups would be affected by the Congressional Republican approach to the tax cuts and by President Obama’s approach, which the Senate Democrats are generally following. (You can find state-specific versions of this report here.)

Senate Democrats’ Proposal Differs from Obama’s in only One Way that Matters

The Senate Democrats’ bill (S.3412) differs from President Obama’s proposal (which we examined in the reports discussed above) in a few ways, but most of these differences will not matter by the time Congress is finished determining how much we should pay in taxes for 2013.

For example, there are two important pieces of President Obama’s approach that Senate Democrats have left out of their proposal (extending relief from the Alternative Minimum Tax through 2013 and extending some, but not all, of the Bush estate tax cut into 2013), but it’s generally assumed that Congressional Democrats will try to enact these proposals later this year or, if necessary, early next year.

There is one real difference between the President’s approach and the Senate Democrats’ proposal in that the latter would extend part of the income tax cuts for stock dividends for those with incomes above $250,000/$200,000. This CTJ fact sheet explains the difference and demonstrates that it benefits the very rich (those making over $1 million) in a significant way.

Dispelling Myths and Calculating Your Taxes under Different Proposals

CTJ has also provided reports to address some of the most common misconceptions about these tax cuts.

For example, it is often asserted that taxpayers with any amount of income in excess of $250,000 or $200,000 will lose all of their tax cuts under the Democrats’ approach. This CTJ report demonstrates that married couples with incomes between $250,000 and $300,000 would lose just two percent of their income tax cuts under President Obama’s proposal and would lose just 1 percent of their income tax cuts under the Senate Democrats’ proposal.

To take another example, Republicans like to say that their proposal would result in lower taxes and that Democratic proposals would result in higher taxes. This CTJ report finds that 13 million working families would actually get more tax breaks under the Democrats’ proposal because it would extend the 2009 expansions of the EITC and Child Tax Credit, which the Senate Republican proposal would allow to expire.

Finally, for those who want to know how they would personally be affected by the competing approaches to the income tax cuts, CTJ has created an online calculator that will tell you what you’d likely pay in 2013 in federal income taxes under the President’s proposal and under the Congressional Republican proposal.

Tax Provisions Not Included in CTJ Figures

All of this work from CTJ has focused on proposals that extend all or part of the Bush tax cuts, and proposals that expand parts of the Bush tax cuts (like the 2009 provisions related to the EITC and Child Tax Credit). We have not included, in any of our figures, additional provisions in the Democratic and Republican proposals to provide tax breaks for small businesses, or the Senate Democrats’ proposal to extend the American Opportunity Tax Credit, which was first enacted in 2009 and helps families pay for post secondary education.

Photo of Senate Majority Leader Harry Reid via Talk Radio News Services Creative Commons Attribution License 2.0



US Chamber Backed Study All Wrong on Tax Cuts



| | Bookmark and Share

A new study by Ernst and Young is grabbing headlines by purporting to show that President Obama’s plan to end most of the Bush tax cuts for the richest 2% of Americans would cause job losses over the long term. This study is highly suspect however because it makes methodological assumptions that are out of line with other independent studies, which actually show that  the expiration of the Bush tax cuts would lead to increased economic growth over the long term.

As the White House explains, the study assumes an entirely unrealistic drop in the labor supply by medium and high income earners due to higher tax rates. Their expected labor supply response is nearly 10 times higher than the non-partisan Congressional Budget Office (CBO) assumes when it makes similar estimates on labor supply effects

In addition, the Ernst and Young study makes the bizarre assumption that all of the additional tax revenue will be used for additional spending, rather than for deficit reduction. While it does not explain any reason for this assumption, the effect of it is to eliminate the possibility that the additional revenue will increase private investment by reducing the deficit’s “crowding out” effect.

When the non-partisan CBO performed a study in January 2012 on the economic effects of allowing the Bush tax cuts to expire using its much more robust assumptions, it found that the extension of all of the Bush tax cuts and other expiring measures would reduce Gross Domestic Product (GDP) by as much as 2.1 percent in 2022 and would reduce Gross National Product (GNP) by as much as 3.7 percent in 2022.

Building on this, Citizens for Tax Justice’s Bob McIntyre notes that even President George W. Bush’s own Treasury Department, which was “managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies,” found that over the long term extending the Bush tax cuts would have “essentially no beneficial effect on the U.S. economy at all.”

Ernst and Young’s reliance on a radical methodology, putting it out-of-line with even the Bush Administration’s Treasury Department, is not be much of a surprise considering that the study was paid for by conservative anti-tax groups like the US Chamber of Commerce and the National Federation of Independent Business. Both these groups have proven in the past that they are willing to distort the facts in order to protect the wallets of the country’s wealthiest corporations and CEOs.

Photo of US Chamber Logo via Truth Out Creative Commons Attribution License 2.0

 



New Poll: Americans Support Ending Bush Tax Cuts for the Rich, Making System More Fair



| | Bookmark and Share

A new poll from the Pew Research Center reports that Americans believe eliminating the Bush tax cuts for the rich would be both beneficial to the economy and make the tax system more fair. By a two-to-one margin, the public says raising taxes on income over $250,000 would help the economy (44%) rather than hurt it (22%), with (a particularly wise) 24% saying it would make no difference. By a similar 44%-to-21% margin, Americans say this tax increase on the rich would make the tax system more fair rather than less fair (25% say no difference would result).

This new finding from a polling organization with an impeccable record contradicts a recent McClatchy-Marist poll which concludes a majority of Americans favor extending all the Bush tax cuts. As an expert pollster with Americans for Tax Fairness (ATF) pointed out, the McClatchy question’s jumbled wording likely left respondents confused as to which groups would be affected by a tax increase. In contrast, the Pew Research Center poll simply asked (PDF): “Do you think raising taxes on income over $250,000 would” help or hurt the economy and make the tax system more or less fair? The Pew Research finding is also in line with other recent surveys, as ATF reminds us, from National Journal and NBC/Wall Street Journal that show most Americans oppose extending the Bush tax cuts for the rich.

As Citizens for Tax Justice has explained, raising taxes on income above $250,000 would result in just 1.9% of all Americans losing some portion of the Bush income tax cuts, and for most, the “loss” would be negligible. For example, an average married couple earning between $250,000 and $300,000 would lose only 2% of their total Bush income tax cuts, or $199, in 2013. This is because all taxpayers—even those in the top income bracket—benefit from the lower tax rates on income below the $250,000 threshold that are set to remain in place under such a plan.

The American public continues to support progressive and fair taxation; we just need our elected leaders to deliver it.

Chart from Pew Research poll overview.



Why the Heritage Foundation Is Wrong about Taxes and Job Creation



| | Bookmark and Share

A report from the conservative Heritage Foundation uses data from the Treasury Department to make the claim that President Obama’s approach to the Bush tax cuts will “hurt job creation.” Once again, the Heritage Foundation is wrong.

The Heritage report focuses on “flow-through” businesses, those businesses that are not organized as corporations that pay the corporate income tax, but rather are organized as entities whose profits are passed on to the owners and taxed as part of their income, under the personal income tax. These businesses are therefore impacted by the debate over the personal income tax cuts first enacted under President Bush.

The report makes much of the fact that most flow-through business income is concentrated among those taxpayers whose income exceeds $200,000, meaning they are close to, or above, the income threshold at which the Bush income tax cuts would expire under Obama’s approach. (President Obama proposes to extend the Bush income tax cuts for the first $250,000 that a married couple makes and the first $200,000 that a single taxpayer makes.)

The Heritage Foundation report is wrong in its conclusion about job creation for several reasons.

First, as CTJ has already demonstrated, single taxpayers can earn considerably more than $200,000 without losing any tax cuts under Obama’s proposal, and married taxpayers can earn considerably more than $250,000 without losing any tax cuts under Obama’s proposal.

Second, there is no reason whatsoever for a business person to create jobs just because his or her taxes are low. A business owner does not pay taxes on the part of business revenue that goes towards paying compensation to employees. Business owners are only taxed on what they take home after they’ve paid their employees and their other expenses. That means that a married couple with a business would need to take home over $250,000 in profits (meaning they take home more than that after paying their business expenses) before they would lose part of their Bush income tax cuts under Obama’s proposal. (And even then they would only pay the higher, pre-Bush tax rates on the portion of their net income exceeding $250,000).

If a business owner can profit by selling the goods or services produced by an additional employee, it makes sense to make that hire regardless of what the tax rate will be on that profit. If the choice is between profiting and paying taxes on the profit or passing up the opportunity to profit entirely, no reasonable person would choose the latter option.

Conversely, if hiring an additional employee will not result in a profit, then there is no reason to make the hire, no matter how low taxes are or how much cash the owner has available.

Anti-tax lawmakers and commentators sometimes claim that business owners will save their after-tax income to make investments that will expand their company and lead to more hiring, and that higher taxes make this impossible. This is generally wrong because large businesses typically borrow to make such investments, and any business that is truly a “small business” can use a provision (known as “section 179 expensing”) that allows them to deduct the entire cost of making those capital investments. President Obama is asking Congress to raise the limits on this tax break so that more small businesses can benefit from it.

Finally, the fact that a great deal of flow-through business income is concentrated among a few high-income owners of big companies does not logically lead to the conclusion that we must provide more tax breaks to the high-income owners of big companies.

The Heritage Foundation cites Table 15 of a Treasury study that looked at different ways of identifying flow-through businesses. The Treasury study found that in 2007 (the most recent year for which data are available) 34.8 million tax returns claimed flow-through income, but only 4.3 million of those represent business owners who employed workers. It also showed that only 1.2 million both employed workers and earned more than $200,000, meaning their income is at or close to the threshold at which they would lose some of the Bush tax cuts under Obama’s proposal. These 1.2 million business owners earned 91 percent of all the income earned by the flow-through businesses with employees.

According to the Heritage Foundation, this data means that the “businesses that earn almost all of the income are the most successful flow-through employer-businesses. That also means they are the businesses that create the most jobs.” This last assertion by Heritage seems particularly dubious, given that these “most successful” flow-through businesses include hedge funds and private equity funds like Bain Capital, law firms, lobbying firms and other extremely profitable companies with relatively few employees — not the companies most Americans think of when they hear the words “small business” or “job creators.”

The Heritage report concludes that Obama’s proposal would result in higher taxes on “almost all income earned by job creators.”

The fact that most flow-through business income is tied up in the hands of a minority of rich Americans does not logically lead to the conclusion that we should therefore keep taxes low for the richest Americans. The data from the Treasury study also shows that 50 percent of the income going to flow-through businesses with employees actually goes to taxpayers with income exceeding $1 million. Given everything explained above (that business people do not create jobs just because their taxes are low) this does not logically lead to the conclusion that we should keep taxes low for people making more than $1 million annually.



Call Congress TODAY to End Tax Cuts for the Rich!



| | Bookmark and Share

Call both your Senators and your Representative today and tell them:

Support President Obama's proposal to allow most of the Bush tax cuts for the richest 2 percent — couples making more than $250,000 and singles making more than $200,000 — to expire.

Oppose any extension of more tax cuts for the rich — even a temporary one.

Call the U.S. Capitol at 888-744-9958 (TOLL FREE)

The Senate will likely vote this week and the House may vote soon after. They need to hear from you NOW.
 

The toll-free number is provided by Americans for Tax Fairness (ATF), a coalition of organizations including Citizens for Tax Justice and other advocacy organizations, think tanks, labor unions, small business associations and watchdog groups.
 
To learn more about how President Obama's proposal compares to the Congressional Republicans' proposal to extend all the tax cuts (even for the rich), check out these publications from Citizens for Tax Justice:

Bush Tax Cut Proposal Calculator: Find Out How Much You Would Pay

The Bush Tax Cuts: President Obama's Approach vs. Congressional Republicans' Approach (includes state-specific versions)

Fact Sheet: How Many People Are Rich Enough to Lose Part of the Bush Tax Cuts Under Obama’s Proposal? (state-by-state figures)

Fact Sheet: Married Couples with Incomes Between $250,000 and $300,000 Would Lose Only 2% of Their Bush Income Tax Cuts under Obama Plan versus GOP Plan

 



Should Congress Just Go Home?



| | Bookmark and Share

If it wanted to, the United States Congress could easily solve the government’s long term fiscal gap by doing what it does best: nothing.

According to a new report from the non-partisan Congressional Budget Office (CBO), the United States federal government debt is projected to peak in 2015 and then drop substantially over the coming decades, all by itself if Congress can just sit on its hands and stop handing out tax breaks to individuals and corporations.

Unfortunately, Republicans are bent on extending all of the Bush tax cuts, which the CBO found earlier this year will add $5.4 trillion to the debt in the next decade alone.

And the Democrats proposals aren’t much better. President Obama’s proposal to extend the tax cuts for the first $250,000 a family makes and the first $200,000 a single person makes would actually result in an extension of 78% of the Bush tax cuts and would cost $3.5 trillion in the next decade. (This is still preferable to House Democratic Leader Nancy Pelosi’s proposal to extend the tax cuts for the first $1 million of income a family makes.)

Congress should, however, increase the budget deficit temporarily if the result will be greater economic growth. But extending the Bush tax cuts would provide very little boost in economic output (compared to proven measures like increased unemployment insurance, food stamps or other types of spending programs).

What Really Would Drive Us Off a Fiscal Cliff

The CBO looked at a few scenarios, including one called the “extend alternative fiscal scenario,” in which Congress extends tax cuts and repeals spending cuts. The result of this one would be the federal debt spiraling out of control, indefinitely. In contrast, CBO’s “baseline scenario,” the scenario in which Congress does nothing, leads to our public debt stabilizing (and slightly falling) after 2015.

Now, there are several people and organizations who’ve made a fetish of reducing the deficit and that focus on spending cuts as the path to a balanced budget. One of the most famous, of course, is Pete Peterson, who runs a foundation, organizes national tours and subsidizes the Committee for a Responsible Federal Budget all in the name of his definition of fiscal responsibility, which means cutting Social Security and Medicare, for starters.  Peterson recently contributed an astonishing $458 million to his own foundation, and hosted a recent Fiscal Summit which featured Bill Clinton, John Boehner, Tim Geithner, Paul Ryan and more journalists than we want to think about.

And indeed, much of the media has accepted this distorted vision of our fiscal situation. Consider  a recent news headline about the same CBO report: “US Risks Fiscal Crisis Without Budget Changes, CBO Says.” The CBO actually said the exact opposite.



Bill Clinton Falls for the Fiscal Cliff



| | Bookmark and Share

Former President Bill Clinton told CNBC that extending all the Bush tax cuts past their scheduled expiration at the end of the year “is probably the best thing to do right now” to help Congress and the country “avoid the fiscal cliff” of expiring tax cuts and scheduled spending cuts. The former policy-wonk-in-chief did not endorse extending the cuts permanently, but said “I don't have any problem with extending all of it now, including the current spending level.”

This is not helpful.

The term “fiscal cliff” sounds scary and implies a situation in which the budget deficit will dramatically worsen if no one intervenes.  But the undeniable fact is it would dramatically improve if Congress simply does nothing – and stops extending the tax cuts! In fact, the CBO has published yet another report indicating that the federal budget deficit would stabilize if not for the budget-busting legislation that most observers expect Congress to enact when it extends all kinds of tax breaks into 2013.  And the report confirms that the measure that would add the most to the deficit would be an extension of the Bush tax cuts.

Of course, it’s entirely true that Congress should set aside concerns about the budget deficit for the time-being and focus on job creation.  The thing is, this focus should lead to increasing federal spending, and NOT to tax cuts. As is often noted, most economists agree that spending measures would do more to stimulate job creation than making the Bush tax cuts permanent.

For example, the widely respected economist (and former adviser to John McCain) Mark Zandi has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents. On the other hand, this private sector economist finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively. Versus 35 cents. Tax cuts don’t work; spending does.

Extending the Bush tax cuts is not about protecting a fragile economy. At its worst, it’s about an ideology that most Americans reject, and at best, it’s passing the buck and kicking the can down the road and every other idiom we have for short-sighted and irresponsible fiscal behavior. Anyone with the clout, credibility and smarts of Bill Clinton knows that and should be making an unambiguous call for these disastrous tax breaks to expire, once and for all, at the end of this year.

(Photo courtesy PBS.org.)



Joint Committee on Taxation Confirms CTJ Figures on Pelosi Proposal



| | Bookmark and Share

The non-partisan Joint Committee on Taxation (JCT), which estimates the revenue impact of tax proposals before Congress, has confirmed CTJ’s calculations of the dire consequences of House Democratic Leader Nancy Pelosi’s tax proposal.

Last week CTJ concluded that Pelosi’s plan to extend the Bush income tax cuts for the first $1 million of income earned by a taxpayer would save 43 percent less revenue than President Obama’s plan, which would extend the income tax cuts for “only” the first $250,000 earned by a family and the first $200,000 earned by a single person.

The JCT figures, which were cited in a new report from the Center on Budget and Policy Priorities, show that Obama’s plan would save $829 billion over a decade, compared to the Republican proposal of extending the Bush income tax cuts for all income levels, and that Pelosi’s plan would save just $463 billion (44 percent less).

CTJ also found that 50 percent of the additional tax cut that would result from Pelosi’s plan (from extending the tax cuts for the first $1 million instead of “just” the first $250,000/$200,000) would go to people with incomes in excess of $1 million.

This would happen because under Pelosi’s plan, millionaires would pay the lower Bush-era tax rates on the first million of their income whereas under Obama’s plan they would pay the lower Bush-era tax rates on “only” the first $250,000 or $200,000 of their income.



Media Blast Pelosi's Move on Bush Tax Cuts, Cite CTJ



| | Bookmark and Share

On Wednesday, CTJ heard that House Minority Leader Nancy Pelosi had sent a letter to Speaker John Boehner asking for an immediate vote on extending the Bush tax cuts for incomes up to $1 million.  We crunched a few numbers and shot off a press release pointing out the fiscal folly of the plan.  Bloggers, reporters, pundits, outlets of all stripes and one very important editorial board cited CTJ’s numbers about the staggering cost of moving the threshold from the $250,000 mark previously set by President Obama.

In his article at RollingStone.com called “Democrats About to Give Away the Store on Bush Tax Cuts. Seriously?,” Jared Bernstein writes that “the (excellent) Citizens for Tax Justice – CTJ also points out that about half the benefits of this higher threshold accrue to – wait for it – millionaires.” He opined that moving the threshold to $1 million is “a bad genie to let out of the bottle.”

Also citing CTJ’s numbers, a Washington Post editorial decried Pelosi’s “risky pander” on the tax cuts, commenting on the minority leader’s “interesting definition of what constitutes the middle class.” The editorial ended with this question: “Do Democrats really want their new slogan to be ‘Almost as irresponsible as the Republicans?’”

The tax geek publication Bureau of National Affairs Daily Tax Report (subscription required) noted that “Citizens for Tax Justice skewered Pelosi’s request, saying that what she is actually proposing is a ‘windfall for millionaires.’”

In noting, “This town may never agree on who is middle-class, but surely we can agree it doesn't include anyone who makes over a million dollars a year,” CTJ’s Bob McIntyre helped frame the early coverage of what we hope will be a short lived idea on Capitol Hill.

For Immediate Release: May 23, 2012

Minority Leader Pelosi’s “Middle Class” Tax Plan Benefits Millionaires, According to New Citizens for Tax Justice Estimate

Washington, DC – In seeking an immediate vote in the House of Representatives to extend tax cuts on incomes up to $1 million, House Minority Leader Nancy Pelosi is actually proposing a windfall for millionaires, according to a preliminary analysis from Citizens for Tax Justice. Pelosi’s proposal to extend the Bush income tax cuts for taxpayers’ first $1 million of income is a departure from President Obama’s proposal to extend the tax cuts for the first $250,000 that a married couple makes and the first $200,000 a single person makes.

“This town may never agree on who is middle-class, but surely we can agree it doesn’t include anyone who makes over a million dollars a year,” said Robert McIntyre, director of Citizens for Tax Justice.

Pelosi’s proposal would save 43 percent less revenue than Obama’s plan.
CTJ’s preliminary estimates show that Obama’s proposal to extend the Bush tax cuts for the first $250,000 or $200,000 of income a taxpayer makes would save between $60 billion and $70 billion in 2013 compared to the GOP proposal to extend all the tax cuts, depending on economic conditions. Leader Pelosi’s proposal to extend the Bush tax cuts for the first $1 million of income would save 43 percent less revenue than Obama’s proposal.

■ 50 percent of the additional tax cuts proposed by Pelosi would go to millionaires.
The additional tax cut that would result from Pelosi’s plan compared to Obama’s plan (the additional tax cut resulting from extending the Bush tax provisions for taxpayers’ first $1 million of income instead of “just” their first $250,000 or $200,000 of income) would not be targeted towards the “middle class.” In fact, 50 percent of this additional tax cut would go to taxpayers with adjusted gross income (AGI) in excess of $1 million.

This would result because under Pelosi’s proposal, a married couple making $3 million a year, for example, would continue to pay the lower tax rates (enacted under President Bush) on $1 million of their income. Under Obama’s proposal, a married couple making $3 million a year would continue to pay the lower tax rates on just $250,000 of their income.

Taxpayers with incomes exceeding $1 million would therefore receive substantially larger tax cuts under Pelosi’s proposal than they would under Obama’s proposal.

Also see our fact sheet about these figures.

Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).



GOP Speaker Boehner Threatens Default if Spending Not Cut Yet Insists on Tax Cuts that Increase the Deficit



| | Bookmark and Share

Republican Speaker of the House John Boehner announced Tuesday that he will refuse to approve any increase in the federal debt ceiling without matching spending cuts — essentially threatening to cause the U.S. to default on its debt obligations. During the same speech, he also announced that he would advance a bill to extend all the Bush tax cuts — which would increase the national debt by hundreds of billions of dollars each year.

The announcement came two months after the Congressional Budget Office (CBO) determined that the federal budget deficit would fall to around $250 billion a year or lower for most of this coming decade if Congress enacts no new laws that increase it. CBO also found that the most significant step that Congress could take to increase the deficit would be extending the Bush tax cuts, which would add about $450 billion to $600 billion to the deficit each year.

This is exactly what Boehner called for on Tuesday, saying Congress should extend the Bush tax cuts for all taxpayers. Under Boehner’s proposal, this would be followed next year by an overhaul of the tax code that eliminates some tax loopholes and tax subsidies, but he made it clear that the tax code should raise no more revenue than it would if the Bush tax cuts were simply made permanent. This would lead to the deficit increase illustrated by the light blue bars in the graph above from CBO’s report.

Bush Tax Cuts Among the Least Effective Ways to Stimulate the Economy

In a sane world, lawmakers would focus on increasing employment until the economy has improved enough for the U.S. to tackle deficit reduction, and many economists agree that almost any measure would do more to stimulate job creation than making the Bush tax cuts permanent.

For example, the noted economist (and former adviser to John McCain) Mark Zandi has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents. On the other hand, he finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively.

Debt Ceiling Needs to Be Raised Because Tax Cuts Increased the Debt

The statutory debt ceiling, first enacted in 1917, was an attempt by Congress to make borrowing easier because lawmakers decided their previous process of approving each bond issued was unwieldy. Little did they know that future Congresses would not increase the ceiling when necessary. Remember, the national debt rises only because Congress already enacted spending increases or tax cuts that could not be paid for, so it’s pretty illogical for the same Congress to then refuse to borrow the money necessary to meet those obligations or even pay holders of existing U.S. debt. This would cause the much-feared default that would send markets into chaos.  

The debt ceiling is like a limit on your credit card – if you could set that limit yourself. What makes the Republican position so bizarre is that it would be as if you spent a thousand dollars on such a credit card and then decided to set your own credit limit at less than $1,000!

Boehner and his allies on the Hill have consistently refused to acknowledge this. For example, they demanded in 2010 that the Bush tax cuts be extended for two years for even the wealthiest taxpayers, increasing the national debt by over half a trillion dollars, along with other tax cuts. (Two thirds of the tax cuts in that “compromise” went to the richest fifth of Americans and a fourth went to the richest one percent.)  

Then, in 2011, House Republicans decried the size of the national debt and threatened to reject a needed increase in the debt ceiling unless federal spending was cut by an equal amount.

2011 Debt Ceiling Deal Worse than Useless

After months of negotiations, President Obama largely capitulated by agreeing to a deal that would cut spending by around $2 trillion but raise no revenue. That 2011 deal allowed the needed increase in the debt ceiling and put in place automatic across-the-board spending cuts on defense and non-defense spending that, it was believed, would encourage Congress to find a more well-thought-out alternative to reduce the deficit.

Boehner’s House Republicans have already tried to undo that deal. The budget plan developed by Republican budget chairman Paul Ryan and passed by the House would cut safety-net programs for the poor while further cutting taxes for the very rich.

Now Speaker Boehner calls for a repeat of the battles over extending the Bush tax cuts and increasing the debt ceiling.

Obama Would Extend “Only” 78 Percent of Bush Tax Cuts

The strange thing is that President Obama’s approach to the Bush tax cuts is not that far off from the GOP approach. While Boehner and other Congressional Republicans demand that all the Bush tax cuts be extended, the President and his allies in Congress propose to extend the Bush tax cuts for the first $250,000 a married couple makes, and the first $200,000 an unmarried taxpayer makes. This comes to about 78 percent of the cost of extending the tax cuts entirely. If anything, President Obama’s proposal would extend far too many of the Bush tax cuts.



Progressive Caucus Budget: The Fairest and Most Responsible Budget Proposal in Congress



| | Bookmark and Share

On Monday, the Congressional Progressive Caucus (CPC) released its budget proposal, which would allow the expiration of a much larger portion of the Bush tax cuts than would expire under President Obama’s plan.

The CPC budget plan, which Citizens for Tax Justice and other organizations helped prepare, would also

—  end the tax preference for capital gains and stock dividends,

— enact the higher income tax rates for millionaires that were proposed by Congresswoman Jan Schakowsky,

— enact the President’s proposal to limit the value of tax deductions and exclusions to 28 cents for each dollar deducted or excluded,

—  end the rule allowing corporations to “defer” U.S. taxes on their offshore profits,

—  close tax loopholes for oil and gas companies,

—  enact a financial crisis responsibility fee (a bank tax).

These are just some of the reforms included in the CPC budget plan that make sense as tax policy and as ways to address the budget deficit.

Ending the tax preference for capital gains and stock dividends and simply taxing all income at the same rates is key to tax reform. (See a related post.) Ending “deferral” in the corporate income tax is a major reform necessary to end the tax incentives for U.S. corporations to shift jobs and profits overseas.

While President Obama’s budget plan would allow only the top two income tax rates to revert to their pre-Bush levels, the CPC budget would eventually allow some other rates to return to their pre-Bush levels.

There are currently six income tax brackets, and President Obama’s plan would allow the top two rates (the 35 and 33 percent rates) to return to their pre-Bush levels. The CPC budget would go further because it would (eventually) also allow the 28 and 25 percent rates to return to their pre-Bush levels, in 2017 and 2019, respectively.

This is more responsible than President Obama’s approach, which would extend 78 percent of the Bush tax cuts. Despite being more fair and responsible than extending all the Bush tax cuts, Obama’s approach would still manage to give significant tax cuts to the richest one percent and richest five percent.



Everything You've Heard on the News about Obama's Tax Proposals Lately Is Wrong



| | Bookmark and Share

The Tax Policy Center (TPC) recently published figures showing that for the vast majority of taxpayers, Obama’s proposal to extend most of the Bush tax cuts would provide benefits that far exceed the tax increases he proposes. Just 6.5 percent of taxpayers would pay more in taxes in 2013, even by a very broad definition of “tax increase.” However, several news stories cited a separate set of figures published by TPC showing that if you put aside Obama’s proposed extension of most of the Bush tax cuts, 27.3 percent of taxpayers would pay more in 2013 under Obama’s tax proposals. This figure has caused some confusion and is, frankly, misleading.

First, the Bush tax cuts do expire at the end of 2012 under current law, so any extension of those tax cuts are, in fact, new tax cuts that reduce what Americans will pay. (Remember, Congress decided during the Bush years and again in 2010 to temporarily cut taxes, but never decided to permanently cut taxes.)

Second, the tax increases that Obama does propose would be trivial for most taxpayers. The relevant tax increases involve proposals to close tax loopholes for corporations and other businesses. Some middle-income and low-income taxpayers own stocks in corporations or interest in businesses that might be affected, but the effects would be trivial for those who are not rich. So, to take an example, when President Obama proposes to close tax loopholes for oil companies, TPC attributes the resulting tax increase to stockholders, a group than includes some middle-income or even a few low-income people. (It is nonetheless true that most corporate stocks and business assets are owned by high-income people, who would therefore bear most of the tax increase.) 

For example, if you look at TPC’s figures that ignore Obama’s proposed extension of the Bush tax cuts, you see that 26.4 percent of those taxpayers in the middle fifth of the income distribution would get a “tax increase” in 2013 — but the average tax increase for this 26.4 percent is just $70. Note that the average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $40 — and again, this would happen only if one ignores the extension of most of the Bush tax cuts.

For the vast majority of taxpayers, the benefits of Obama’s proposed extension of most of the Bush tax cuts are much larger than any indirect tax increases they would face from closing business tax loopholes. If you look at TPC’s figures that do include Obama’s proposed extension of most of the Bush tax cuts, you see that only 4.2 percent of those taxpayers in the middle fifth of the income distribution would face a tax increase, and the average tax increase for this 4.2 percent is only $76. (These would be people who don’t benefit from the extension of the Bush tax cuts, but do own a small amount of corporate stock.) The average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $1,133.

Two Sources of Confusion: Baselines and Small, Indirect Tax Increases

So the first part of the confusion stems from the fact that TPC publishes figures in two different ways. To use wonky terms, TPC provides one set of figures that compares the effects of Obama’s tax proposals to the “current law baseline,” which means, well, what the current law actually says is going to happen. And current law says the Bush tax cuts expire at the end of 2012. TPC provides a separate set of figures that compare Obama’s tax proposals to a “current policy baseline,” a hypothetical scenario that assumes that all of the Bush tax cuts are made permanent, even though that has never actually happened. (It’s unclear why we should use the term “current policy” to describe proposals that some lawmakers want to enact, but which Congress has not enacted.)

The second part of the confusion stems from the fact that TPC assumes that closing tax loopholes for multinational corporations, oil companies and other businesses will result in indirect tax increases on the owners of these businesses, which, to a very small extent, includes a few moderate-income taxpayers. These indirect tax effects may be real, but most people don’t think that this as a reason to leave in place tax loopholes for major profitable corporations and other businesses.



CBO Says Budget Outlook Will Improve Dramatically If Congress Simply Stops Passing Tax Cuts



| | Bookmark and Share

On Tuesday, the Congressional Budget Office reported that the federal budget deficit will fall from $1 trillion this year to less than $300 billion over the next several years — but only if Congress can resist enacting budget-busting laws like another extension of the Bush tax cuts, which would more than double the projected deficit.

Budget experts have long known that our deficit would be largely under control if Congress would simply stop extending the Bush tax cuts. But this might be news to anyone who listens to lawmakers insisting that public services must be cut dramatically to balance the budget.

What these lawmakers really mean, but never say, is that public services would need to be slashed to pay for a further extension of the Bush tax cuts — despite the lack of any evidence that these tax cuts have helped America.

The CBO report shows that extending the Bush tax cuts through the next decade would cut revenues by $4.6 trillion over the next ten years, and cost an additional $0.8 trillion in interest payments on the national debt — thus adding a total of $5.4 trillion to the national debt!

In the face of these frightening numbers, Republicans in Congress want to extend all of the Bush tax cuts. The Democrats are not much better. President Obama has proposed to extend about 81 percent of the Bush tax cuts, and most Congressional Democrats have followed his lead. 

Even organizations that have the ostensible purpose of promoting a balanced federal budget fail to see that Congress could help the budget situation dramatically by simply refusing to pass any more tax cuts. For example, take this statement about the CBO report from the Committee for a Responsible Budget:

The good news is that under current law assumptions, the debt would become more manageable in the medium term. The bad news is that these policy assumptions are politically unrealistic, suboptimal, and not a long-term fix.

Why would the so-called “Committee for a Responsible Budget” first acknowledge that the government will approach budget balance if Congress does nothing, and then insist that Congress has to pass laws that take us off that path? What’s so “suboptimal” about allowing the Bush tax cuts to expire?

Their argument is that the economy will suffer if the tax cuts expire at the end of this year. The Republicans in Congress make a much more extreme claim, which is that the economy will suffer if any portion of the tax cuts ever expires.

None of this is supported by evidence. Expiration of the Bush tax cuts would allow taxes to return to the levels in place at the end of the Clinton years. If anyone is worried about tax policies that are “suboptimal” for the economy, they should not fear the tax rates that existed during the boom years that Clinton presided over. If we need further short-term stimulus next year, then there are far better, fairer and less costly ways to achieve it.

Sometimes, lawmakers and others claim they worry that low- and middle-income people will suffer if they have to pay Clinton-era tax rates again.

This is absurd. A fact sheet from CTJ shows who would benefit from another extension of the Bush tax cuts. The folks who are struggling the most in America today, the poorest fifth of taxpayers, would receive just 1.1 percent of the tax cuts in 2013. The bottom three-fifths of taxpayers would receive just 13.4 percent of all the tax cuts.

On the other hand, the richest five percent of taxpayers would receive 47.2 percent of the tax cuts, and the richest one percent alone would receive 31.3 percent of the tax cuts.

It’s reasonable to argue that the parts of the Bush tax cuts that go to low-income Americans should be made permanent, because they help people who truly need help. These include, for example, the provisions that expand the Earned Income Tax Credit and the refundable part of the Child Tax Credit.

But low-income tax breaks represent only a small part of the cost of overall Bush tax cuts. So Congress could and should extend those parts of the tax cuts that go to people who need them without busting the budget. If Congress instead sends President Obama another bill extending all or most of the Bush tax cuts, then he should get out his veto pen.



The Top Five Tax Myths to Watch Out for this Election Season



| | Bookmark and Share

As the presidential campaigns rev up, taxes are emerging as the defining issue of the election. Unfortunately, a lot of misinformation and myths about taxes are spreading as candidates and commentators look to push their different economic agendas.

To start the election season off, here is a breakdown of the five biggest tax whoppers being told by the candidates and commentators alike.

1) Myth: 47 Percent of Americans Do Not Pay Taxes

Fact: All Americans Pay Taxes

Pundits and politicians will continue to rile up audiences this election season by claiming that half of Americans in the U.S. do not pay any taxes. This talking point is used to deflect questions about why the rich should pay their fair share.

The basis of this claim is data showing that 47 percent of Americans did not owe federal income taxes in 2009, which the recession was at it's peak. The claim ignores the much more regressive federal payroll taxes or state and local sales, income, and property taxes that all Americans pay. The reality is that three-quarters of American households actually pay more in payroll taxes than federal income taxes.

Adding to this, the very reason many low income Americans do not pay federal income taxes is because they benefit from highly effective tax credits like the earned income tax credit (EITC), which incentivize work while providing much needed support to working low and middle class family budgets.

2) Myth: The American People and Corporations Pay High Taxes

Fact: The US Has the Third Lowest Taxes of Any Developed Country in the World

Total US taxes are actually at the lowest level they’ve been since 1958. The US has the third lowest level of total taxes of the Organisation for Economic Co-operation and Development (OECD) countries, with the exception of only Chile and Mexico. President Obama, who is often falsely accused of raising taxes, actually cut taxes for 98 percent of the country on top of temporarily extending the entirety of the Bush tax cuts.

A related claim is that the US has the second highest corporate tax rate in the world. This is misleading because it’s based on the on-paper (statutory) corporate rate rather than the actual (effective) rate that corporations pay. Because of the plethora of corporate tax breaks and loopholes, the US actually has the second lowest coporate taxes as a share of GDP in the OECD. In fact, 30 major corporations, including Verizon, Boeing and General Electric, paid nothing in corporate taxes over the last 3 years.  Rather than cutting corporate taxes, the sensible solution is to pass revenue-positive corporate tax reform.

3) Myth: Cutting Taxes Creates Jobs and Raises Revenue

Fact: Tax Cuts Reduce Revenue And Are Not Associated with Economic Growth


Since the rise of supply-side economics, tax cuts for the rich have been regarded as a magic elixir that could unleash economic growth, while simultaneously increasing government revenue.

The reality is that the tax cuts that have been tried for over 30 years have proven to be a stunning failure in all regards. In fact, history has shown that the tax rate on the wealthy simply has nothing to do with economic growth. Just consider the strong growth that occurred after President Clinton increased taxes versus the dismal growth following the Bush tax cuts.

Not surprisingly, tax cuts have been definitely proven to reduce revenue. Even President Bush's own Treasury Department concluded that tax cuts do not create enough economic growth to to come close to offsetting their costs or raising revenue. The Bush tax cuts cost $2.5 trillion in their first decade and the Reagan tax cuts cost $582 billion.


4) Myth: The US tax system is very progressive because wealthy individuals already pay a disproportionate amount of taxes.

Fact: At a Time of Growing Income Inequality, the US Tax System is Basically Flat.

Conservative commentators and politicians claim that it would be unfair to raise taxes on wealthy individuals because they already pay a disproportionate amount of taxes, usually citing the fact that the top one percent of income earners pay 38 percent of federal income taxes. Once again, such claims ignore the fact that the federal income tax is just one of many taxes that individuals pay.

When you take into account all of the taxes that individuals pay, the truth is that our tax system is relatively flat. The top one percent of income earners receives 20.3 percent of total income while paying 21.5 percent of total taxes and the lowest 20 percent of income earners receive 3.5 percent of total income while still paying out two percent of total taxes.

In other words, wealthy individuals pay a high percentage of taxes because they earn a highly disproportionate amount of income. This is, of course, a consequence of growing income inequality in the United States, which is at a level not seen since before the Great Depression

5) Myth : The “Fair Tax” or a flat tax would be more “fair”

Fact: The “Fair Tax” or a Flat Tax Would Make Our Tax System Even More Regressive

Whether it’s Steve Forbes promoting his flat tax proposal in 1996 and 2000 or Rick Perry and Newt Gingrich in the 2012 presidential race today, the idea to sweep away our current tax system and replace it with a single rate, flat income or national sales tax (called the “Fair Tax”) has become a perennial campaign issue for Republican presidential candidates.

The simplicity of these proposals has much appeal for many Americans, who believe they would make filing taxes less complex and, at the same time, stop wealthy individuals from being able to game the tax system.

A deeper look, however, reveals that both the “fair” and flat tax are very regressive compared to our current system. One recent analysis of a typical flat tax proposal from last year shows that it would result in an average tax increase of $2,887 for the bottom 95 percent of Americans, while those in the top one percent would receive an average tax cut of over $209,562. Furthermore, the Institute on Taxation and Economic Policy’s analysis of the Fair Tax points out the under this system, the sales tax rate would have to be set at a politically and administratively unfeasible rate of at least 45 percent, and, the result would be the bottom 80 percent of American’s paying an average of 51 percent more in taxes compared to our current system.

It’s also important to note that “complexity in the tax code,” which a flat tax system purports to fix, is not caused by our progressive rate structure; rather, it’s the multitude of loopholes and tax breaks, all of which could easily be eliminated while keeping a progressive tax rate structure in place. 



Senator Kyl Supports Middle-Class Tax Cuts Only if Paired with Far Larger Tax Cut for the Rich



| | Bookmark and Share

The graph below compares the impacts of the Democrats’ proposed payroll tax holiday with a tax policy that is more progressive (reviving the Making Work Pay Credit) and a policy that is far more regressive (the Bush tax cuts, which are already in effect through 2012). Senator Jon Kyl, the second highest ranking Republican in the U.S. Senate, now says he would agree to extend the payroll tax cut only if Democrats agreed to extend the far more regressive policy, the Bush tax cuts.

These figures disturbed us because even the Democrats’ proposal is not really all that progressive. If the 6.2 percent Social Security payroll tax paid by workers is reduced to 3.1 percent as Democratic leaders propose, the richest fifth of taxpayers will receive $83 billion in 2012 while the poorest fifth of taxpayers will receive just $7 billion.

Apparently that’s not regressive enough for Jon Kyl. The blog Think Progress notes that on Monday, Senator Kyl said on the Senate floor that when the payroll tax cut was enacted for one year at the end of 2010, that “was part of an overall agreement in which we said we will extend all of the existing tax rates — the so-called Bush tax cuts… we would extend this temporary tax holiday from the payroll tax cut, we would extend all of those. And I supported that… Now if we can do that again, I’m all for it. I’ll support the extension of the payroll tax holiday.” 

The graph shows that the Bush tax cuts in 2012 will provide the richest fifth of taxpayers with $231 billion and will provide the poorest fifth of taxpayers with just $3 billion. For more, read our short report on these figures.



The Washington Post's Faulty "Fact Checker"



| | Bookmark and Share

It would require a full-time staff person to respond to all the inaccuracies we regularly see in Washington Post’s “The Fact Checker” column by Glenn Kessler, but an episode from this week really stands out.

Kessler attempts to pick at a segment of President Obama’s speech on Tuesday in Kansas, during which he said,

“I mean, understand, it's not as if we haven't tried this theory. Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did they get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country…”

Kessler admits that “it is correct that most of the benefits of the tax cuts flowed to the wealthy” but then writes that Obama “should not suggest that the Bush tax cuts were only aimed at the wealthy, since that is not correct.”

In truth, the Bush tax cuts were “aimed at the wealthy,” and a few bits and scraps were dropped to low- and middle-income people to distract inattentive people like Glenn Kessler from this fact. We estimated that by 2010, when the Bush tax cuts were fully phased in, about 52 percent of the benefits went to the richest five percent of taxpayers and just under 75 percent of the benefits went to the richest fifth of taxpayers. Less than 13 percent of the benefits went to the bottom three fifths of taxpayers. Can anyone seriously doubt that the Bush tax cuts were “aimed at the wealthy”?

It’s true that they are slightly less aimed at the wealthy today because the part of the Bush tax cuts that repealed the estate tax was partially extended, rather than fully extended, in the December 2010 deal that extended all the tax cuts for two years. We projected the distribution of the tax cuts in the event that they’re extended again in 2013 (including the estate tax cut currently in place) and the figures are not much different from our 2010 figure.

Kessler also complains that, “The Bush tax cuts have been roundly criticized for being inefficient and poorly designed, but it is a stretch for Obama to blame slow job growth on the tax cuts. There are many factors that affect job growth…”

This actually seems like a misinterpretation of what President Obama said. The President seems to be making the point that the sole Republican response to economic downturns is to cut taxes, particularly tax cuts for the wealthy investor class, and this doesn’t get the job done. Research backs this up. Economic growth was lower after these types of tax cuts were enacted in the Reagan and George W. Bush years than after the tax hikes enacted during the Clinton years.

This is not to say that President Obama or Democratic leaders have done a stellar job on economic policy. Kessler rightly points out that President Obama’s tax plan, which was filibustered by the Republican minority in the Senate last year, would have extended most of the Bush tax cuts even while allowing those going exclusively to the very rich to expire. Still, this doesn’t change the fact that the Bush tax cuts were “aimed at the wealthy” and failed to help our economy in any of the ways that their proponents promised they would.

On Sunday, the second highest ranking Republican in the U.S. Senate, Jon Kyl, said, “The payroll tax holiday has not stimulated job creation. We don’t think that is a good way to do it.” Asked why he opposes letting the Bush tax cuts end for the rich or imposing a surcharge on millionaires while also opposing this particular measure to keep taxes low, he replied, “The best way to hurt economic growth is to impose more taxes on the people who do the hiring. As a result, the Republicans have said, ‘Don’t raise the existing tax rates on those who do the hiring.’”

In other words, keep taxes low for the rich. A new report from CTJ shows that the Bush tax cuts supported by Senator Kyl will provide $231 billion in benefits to the richest fifth of taxpayers in 2012 and just $3 billion to the poorest fifth of taxpayers during that same year.

The payroll tax cut proposed by President Obama and Senate Democrats is more evenly distributed but is not particularly progressive. The CTJ report shows that it would provide $83 billion to the richest fifth of taxpayers and $7 billion to the poorest fifth of taxpayers.

Most economists agree that government spending measures are the most effective way to put more money in the hands of consumers to spend and thereby reduce unemployment. But if lawmakers insist on using tax policy instead, they should enact tax cuts that are targeted to those low- and middle-income consumers who are likely to immediately spend any new money they receive.

The Senate Democrats’ payroll tax cut proposal, which would be offset by a surcharge on millionaires (see related story), won a majority of votes yesterday (50 Democrats and one Republican voted in favor) but was blocked by the remaining Senators. Republican leaders offered their own payroll tax cut that would be offset by cutting back federal government positions and pay, but this did not even receive support from a majority of Republicans in the chamber.

The CTJ report points out that a better option would be to revive the Making Work Pay Credit that expired at the end of last year, which has been discussed by some Senators but ignored by leaders of both parties.

The report finds that if the Making Work Pay Credit was in effect in 2012, the richest fifth of taxpayers would receive $11 billion while the poorest fifth of taxpayers would receive $7 billion, making it a less costly and more targeted tax cut.



New from National Priorities Project & CTJ: The Cost of the Bush Tax Cuts for the Rich



| | Bookmark and Share

The National Priorities Project, working in partnership with Citizens for Tax Justice, has unveiled a new website that presents a running tally of the cost of the Bush tax cuts for the richest five percent, who now receive almost half of the total tax cuts. The cost is also broken down for the richest one percent and the next richest 4 percent.

As the Joint Select Committee on Deficit Reduction (aka "Super Committee") considers drastic cuts in public investments and services that working people depend on, the amount of revenue lost due to tax cuts for the rich cannot be ignored. As CTJ has said for years, we will never have the revenue necessary to invest in the American people until these tax cuts are allowed to expire.

See the website: www.costoftaxcuts.com

Senator Chuck Schumer of New York today said he is hesitant to support President Obama's tax proposals because, “There are people making 250, 300 [thousand dollars] in many of our states who are not rich.”

Actually, Citizens for Tax Justice calculated that married couples with income between $250,000 and $300,000 would get to keep 99 percent of their Bush tax cuts, on average, under the tax plan promoted by President Obama last year.

That plan, which the President continues to tout, would extend the Bush income tax cuts for the first $250,000 of income a married couple receives, or the first $200,000 of income an unmarried taxpayer receives.

This means that a married couple making $250,100 would pay higher taxes on just one-hundred dollars of income at most. President Obama's plan would continue the tax cuts for income even beyond $250,000/$200,000 for many taxpayers once deductions and other breaks are factored in.

As a result, CTJ found that three quarters of all couples in the $250,000 to $300,000 income range would continue to enjoy all of their Bush income tax cuts if President Obama’s plan was in effect in 2011.

Another report from CTJ explains that 84 percent of the revenue savings under the President’s tax plan would come from taxpayers with incomes exceeding $1 million. The report also explains that married couples with income above $250,000 and unmarried taxpayers with income above $200,000 are the richest 2.6 percent of Americans. Even in Senator Schumer’s state of New York, only 3.5 percent of taxpayers have incomes exceeding the $250,000/$200,000 threshold. If they can’t afford to pay higher taxes, who can?

Some of the taxpayers Senator Schumer is worried about would actually pay less under President Obama’s plan. For example, a childless married couple making $250,000 in wages and taking the standard deduction in 2011 would pay $935 less in income taxes if President Obama's plan was in effect.

See CTJ's online tax calculator which determines how much a taxpayer would pay under the different tax proposals that were debated last year.

President Obama’s tax plan would allow the tax rates for the top two income tax brackets to revert to what they were at the end of the Clinton years. The President’s plan would also adjust the income tax brackets so that a married couple with income below $250,000 (or an unmarried taxpayer with income below $200,000) cannot possibly be affected by the top two income tax rates.

This adjustment in the tax brackets would result in a tax cut for some taxpayers, including the $935 tax cut for the married couple in the example above.

Here’s the technical explanation. There are six income tax brackets. The President’s plan pushes up the level of income you must have before you’re affected by the fifth bracket. That would mean that a portion of income that is currently taxed in the fifth income tax bracket would be taxed instead in the fourth income tax bracket, which has a lower tax rate. (Interested wonks can go to page 128 of the President’s budget blueprint that explains this arcane adjustment.)

And just in case anyone is concerned that the taxpayers described by Senator Schumer are small business people who will lay off all their employees in response to even the slightest possibility of higher tax bills, see CTJ’s report, The Bush Tax Cuts and Small Business.



CTJ's Statement on President Obama's Jobs and Deficit Plan



| | Bookmark and Share

Obama’s Plan a Massive Tax CUT Despite GOP Claims of “Largest Tax Hike in Modern History”

While House Republican Leader Eric Cantor’s staff and others have called President Obama’s jobs and deficit plan the “largest tax hike in modern history,” the unfortunate truth is that it actually cuts taxes overall and increases the deficit.

There is much to like about the plan, as explained below. Citizens for Tax Justice applauds President Obama’s vow yesterday to, in his words, “veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.”

Unfortunately, however, President Obama’s proposals would ultimately reduce taxes far more than raise them, compared to current law.

The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.

The President’s claims that he is raising revenue are based on the common, but misleading, practice of comparing a given proposal to an alternative “baseline” that assumes Congress has already increased the deficit enormously by making permanent the Bush tax cuts. By this logic, we do not see what stops the President from comparing his plan to a baseline that assumes Congress repealed the federal income tax, in which case his plan would “raise revenue” even more successfully.

Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021!

The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.

Revenue could be raised by closing corporate tax loopholes, but unfortunately the President’s plan calls for a reform of the corporate income tax that is “deficit-neutral.” We believe that most, if not all, of the revenue-savings resulting from closing corporate tax loopholes should go towards deficit-reduction or job creation and public investments, rather than paying for more breaks for corporations. (See one-page fact sheet on why corporate tax reform can be “revenue-positive.”)

There are some good ideas in the President’s tax proposals that would raise revenue compared to current law and that would ask those whose incomes have grown the most in recent years to pay something closer to their fair share. This includes his proposal to limit deductions and exclusions for the wealthy, which we estimate would affect only 2.3 percent of taxpayers. (See related report.) Certainly Congress should pursue these types of tax provisions and loophole-closing measures.

But ultimately, our nation is going to need significantly increased revenues to pay for essential public programs and services. Starting off with a gigantic tax cut that makes 80 percent of the Bush tax cuts permanent, as Obama proposes, only digs our deficit hole deeper — and makes big reductions in Social Security and Medicare even more likely.



Advocates of Low Taxes Admit that Clinton Era Rate Hikes Did Not Hurt the Economy



| | Bookmark and Share

When House Speaker John Boehner said on Thursday that “tax increases destroy jobs” and are not a “viable option” for the Joint Select Committee tasked with reducing the budget deficit, he was probably unaware that a major business lobbyist and a high-profile conservative economist had admitted a day earlier that the last significant tax increases did not hurt the economy.

Bill Rys of the National Federation of Independent Businesses (NFIB) tried to explain to the Senate Finance Committee on Wednesday his view that tax increases today would hurt the economy even though the economy thrived after the 1993 tax hikes enacted under President Clinton.

“In the 1990s,” he said, “we had a dot.com boom, we had Y2K, a lot of money being spent there, so we had much stronger economic winds pushing, pushing, which we don’t have right now.”

The obvious circularity of the argument seemed to go unnoticed by members of the committee. Rys said, in essence, that the tax increases of the 1990s did not prevent economic growth because we had economic growth in the 1990s.

Stephen Entin of the conservative Institute for Research on the Economics of Taxation, made a similar comment to explain why the Clinton tax increases did not cause the economic stagnation that he predicts would result from tax increases today.

“The Clinton marginal tax rate increases were fairly modest and we were coming out of a downturn. The growth was going to look good anyway.”

Most of the tax increases proposed today, which Entin believes will lead to a reduction in GDP, actually would just allow some rates to revert to the Clinton-era rates, so it’s surprising that he calls the Clinton tax increases “fairly modest.”

Even more surprising is his comment that the Clinton tax increases were not damaging because “we were coming out of a downturn.” No one asked the obvious follow-up question: If tax increases did not prevent a recovery in the 1990s, why would they prevent a recovery today?

Entin went on to say that what also allowed the economy to grow in the 1990s was the capital gains cut signed into law by President Clinton in 1997, which reduced the top capital gains rate to 20 percent.

“Please remember that he did sign a capital gains tax reduction and a lot of the growth in that decade was due to that reduction in the cost of capital. It dwarfed the effect of raising the marginal rates.”

The capital gains cut did not go into effect until 1998 so it’s interesting that Entin thinks that accounted for “a lot of the growth in that decade,” meaning the 1990s.

It’s also noteworthy that allowing the Bush tax cuts to expire would allow the top capital gains tax rate to simply revert to 20 percent, the rate that Clinton enacted and which Entin seems to think was conducive to growth.

A close look at the numbers demonstrates that there is no policy basis for allowing capital gains income to be taxed at lower rates than ordinary income. Advocates of tax cuts for investment income have for years argued that the revenue collected from taxes on capital gains will actually rise in response to a capital gains tax cut, but the data does not bear this out. For example, capital gains tax revenue was lower in the years following Bush’s 2003 capital gains tax cut than during the Clinton years. This revenue fluctuates with the economy and does not seem correlated with tax rates.

Of course, we could give Rys and Entin the benefit of the doubt and assume they really mean that economic growth would have been even higher during the 1990s if President Clinton had not raised tax rates. But even that argument is entirely unsupported by the data. A 2008 report from the Center for American Progress and the Economic Policy Institute compares the economic recoveries following the major tax changes enacted during the administrations of Presidents Ronald Reagan, Bill Clinton, and George W. Bush. The report illustrates that the recovery under Clinton was far stronger, despite the tax increases that he enacted, than the recoveries during the other two administrations. 

Rys and Entin have both long advocated for making permanent all of the Bush tax cuts and enacting additional tax reductions. In 2010 CTJ wrote a response to arguments made by Rys and NFIB concerning the impacts of taxes on small businesses. In 2009 CTJ wrote a response to a report from Entin claiming that elimination of the estate tax would actually increase revenue.



President Obama Proposes Payroll Tax Holiday Nearly Equal in Size to Bush Income Tax Cuts for 2012



| | Bookmark and Share

Estimates provided by the White House show that the payroll tax cuts proposed last night by President Obama would cost $240 billion next year, just shy of the $245 billion cost of the Bush income tax cuts during the same year as estimated by Citizens for Tax Justice.

Republican lawmakers were the original proponents of a payroll tax holiday. But lately many of them have spoken out against it or are reluctant to endorse it because the President supports it. Apparently cost is not the reason for their objection, given their support of the Bush tax cuts.

The payroll tax cuts, which would go into effect in 2012 and which are the largest parts of the jobs plan announced by the President last night, have several components. The payroll tax cuts for workers would cost $175 billion, while the payroll tax cuts for employers would cost $65 billion, for a total of $240 billion.

Economists generally find that the most effective measures to mitigate a recession include programs that directly create jobs (such as Obama’s proposals to hire or retain school teachers and fix schools). Also at the top of the list are direct spending programs by the government on things like unemployment benefits (also included in Obama’s plan), since they go to the very people who are most likely to immediately spend any money or benefits they receive.

But some lawmakers oppose any and all new government spending, creating an obvious political constraint that the President has tried to navigate by proposing payroll tax cuts and other tax breaks that make up over half of the $447 billion cost of his jobs plan.

Payroll Tax Cuts for Workers: $175 Billion

As part of the tax compromise enacted at the end of last year, a one-year payroll tax cut is in effect for 2011, reducing the 6.2 percent Social Security payroll tax paid directly by workers to 4.2 percent. President Obama proposes to extend this break into 2012 and expand it by further reducing the tax paid by workers to 3.1 percent.

As we have explained before, cutting payroll taxes for workers is neither the best nor the worst possible tax measure. A tax credit that is more targeted to low- and middle-income people, like the Making Work Pay Credit, would be more effective because it would target money more towards people who are likely to spend it immediately and thereby give an immediate boost to the economy.

On the other hand, a payroll tax cut for workers is dramatically more targeted to low- and middle-income people than the other types of tax cuts that are usually debated (like the Bush tax cuts).

Payroll Tax Cuts for Employers: $65 Billion

The President’s plan would also reduce the Social Security payroll tax paid by employers to 3.1 percent for the first $5 million in wages paid in 2012. This break would go to all employers. The plan would also eliminate the entire 6.2 percent payroll tax paid by employers for any increase in a firm’s payroll up to $50 million.

Giving all companies a break for the first $5 million in wages is not likely to be effective because it gives employers a tax break regardless of whether or not they increase hiring. Economists have pointed out that many companies are stockpiling cash that they already could use to hire more workers, and a recent survey of business owners reveals that labor costs are nowhere near their main concern. In other words, only increased demand for goods and services can really prompt businesses to hire more workers. 

Some economists do believe that the payroll tax cut for businesses that expand their payroll will be more effective. But there are several reasons to be skeptical about the number of jobs that will be created as a result of this measure. First, most of this tax break will go to companies that would have expanded their payrolls anyway. Second, the payroll expansion in many cases will not mean new hires but could simply take the form of pay raises for existing employees. (This problem would be limited to a degree because the Social Security payroll tax does not apply to wages in excess of $106,800).

What businesses really need are customers. A payroll tax cut or a more targeted tax credit could help somewhat to produce more customers by putting cash in the hands of people who will spend it. But the other parts of the President’s plan, like transportation projects, extending unemployment insurance, modernizing schools, and rehiring teachers will almost certainly provide far more bang for the buck.



Pelosi Picks Three Tax Fairness Champions for Deficit "Super Committee"



| | Bookmark and Share

House Democratic Leader Nancy Pelosi today appointed members to fill the three seats allotted to her for the 12-member “super committee” created under the recent debt deal.

Last December, all three voted against the “compromise” that extended the Bush tax cuts entirely, even for the richest Americans, for two years. All three also received high scores from CTJ’s legislative report card during the previous administration for opposing President George W. Bush’s regressive tax cuts.

Pelosi’s appointees are Xavier Becerra of California, James Clyburn of South Carolina, and Chris Van Hollen of Maryland.

This move by Pelosi provides needed reassurance to advocates of tax fairness. The six Republican members of the super committee have all taken Grover Norquist’s infamous “no new taxes” pledge. The Senate Democrats appointed to the committee have a more mixed record on taxes (see related post.)

Photo via Campus Progress Creative Commons Attribution License 2.0



S&P Report Cites Bush Tax Cuts as a Reason for Downgrade



| | Bookmark and Share

At the end of last week, Standard & Poor’s (S&P), one of the three major credit rating agencies, downgraded the credit worthiness of the United States for the first time and specifically stated that allowing the Bush tax cuts to expire for the wealthy would justify a return to the highest possible rating.

S&P’s report says that its “upside scenario,” which could allow the rating to be upgraded to “stable” “incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”

S&P: The Broken Clock

Of course, S&P is right that allowing the Bush tax cuts to partially expire for the rich (at least) would improve our fiscal situation. But S&P’s accurate observation on this point is akin to the broken clock giving the correct time twice a day.

It’s worth pointing out that this is one of the rating agencies that convinced an awful lot of people that mortgage-backed securities were perfectly safe in the run up to the economic collapse that triggered bank bailouts by the Bush administration. Investors seemed entirely unconvinced by the report on Monday, when they traded in stocks and bought up the very Treasury bills that S&P claims now carry some risk of default. Some observers have even suggested that S&P’s downgrade is a threat to prod Congress and the Administration to undo the stricter regulations on credit rating agencies that were enacted as part of the Dodd-Frank financial reform.

Perhaps the most damning indictment of S&P’s report is the $2 trillion mistake that the Administration identified, which S&P responded to by simply changing the rational for its downgrade from an economic one to a political one. S&P told the Administration that the $2 trillion mistake did not substantially alter its conclusion. But as observers have noted, the report makes clear that ending the Bush tax cuts for the rich (which would only save $950 billion) would alleviate the need for the lower rating.

Stating the Obvious: Congress Is Dysfunctional and Held Hostage by the Tea Party

All that being said, the report’s conclusions about America’s politics are correct, if rather obvious. “The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” the report admonishes. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”

Of course Congress is less effective than ever. In fact, it’s utterly dysfunctional. No legislation of any significance can be passed in the Senate without a supermajority of members in support, which has not been the case historically (contrary to what many believe). As a result, President Obama’s proposal to extend the Bush tax cuts entirely for all but the richest two percent failed to pass last year despite support from a majority of the House and a majority of the Senate.

Now Republicans have established that they will vote against any increase in the debt ceiling (which is comparable to refusing to pay a credit card bill after you knowingly made half your purchases on it) unless they receive major policy concessions that most Americans do not support.

Tea Party lawmakers are willing to hold the legislative process hostage. In fact, the Republican Senate leader now uses the words “hostage” and “ransom” to describe the party’s legislative strategy regarding debt ceiling negotiations. House Republican Whip Eric Cantor responded to S&P’s report by exhorting his party to hold firm against any proposal to raise revenue.

Despite the many shortcomings of S&P, last week’s downgrading of the U.S.’s credit rating ultimately is the Tea Party Downgrade.



Democrats on Super Committee Excel at Compromise, Unfortunately



| | Bookmark and Share

 

vote machine.jpg

The three Democratic Senators appointed by Harry Reid to sit on the “super committee” established under the debt deal voted for the President’s disastrous budget compromise in December of 2010 that extended the Bush tax cuts for another two years.

Sending these three in to negotiate with members who passed an anti-tax litmus test to get there is worrying.

How did the three perform on other tax votes? Senators John Kerry and Patti Murray have a record of voting against costly and regressive tax cuts, while Senator Max Baucus has a mixed record. 

Baucus actually received a failing score on CTJ’s legislative report card during the Bush years because of his support for many regressive tax cuts.  On the other hand, Senator Baucus led the charge in 2010 to end the Bush tax cuts for the rich.

All three of these Senators deserve credit for voting last year to extend the Bush tax cuts only for those earning below $250,000, which was, at least, better than the Republican proposal to extend the tax cuts entirely.

If these are the Senators charged with holding the line against no-revenue-no-way Republicans, then they’re going to need some reinforcements.  

 



All Cuts, No Revenues: Both Parties Abandon "Balanced Approach" in Debt Ceiling Proposals



| | Bookmark and Share

Lawmakers have made one important decision this week as the debt ceiling negotiations come down to the wire: the wealthy should not have to sacrifice even a dime of their tax cuts or loopholes to reduce the deficit.

Both Democratic Majority Leader Harry Reid and Republican Speaker of the House John Boehner have proposed plans to cut hundreds of billions in spending on government programs (from food safety to college tuition assistance) in order to raise the debt ceiling, without requiring any revenue be generated through ending tax loopholes or tax cuts for the rich.

Boehner’s plan requires an immediate $1.1 trillion dollars in spending cuts over the next 10 years in order to raise the debt ceiling this year, and would also require that we find another $1.8 trillion in cuts in order to raise the debt ceiling again in 2012.

The proposed spending cuts would place a such a harsh additional burden on lower income families that the usually mild mannered Bob Greenstein, Director of the Center on Budget and Policy Priorities, pointed out that Boehner’s plan was “tantamount to a form of ‘class warfare’” and that “it could well produce the greatest increase in poverty and hardship produced by any law in modern US history.”

The new push by both parties for a spending-cuts-only approach stands in great contrast to President Obama’s Monday night address to the nation, which called for a more ‘balanced approach.’

What makes this change in approach even more self defeating is the fact that the anti-tax ideologues have long since lost the public. In fact, well over 19 polls in just the last few months show that the public overwhelmingly favors increasing taxes generally, with larger percentages supporting raising taxes on just the wealthier individuals.

Even after extracting a pound of flesh from Democratic lawmakers, anti-tax forces may still not be satisfied. These groups are pushing for nothing short of passage of the ‘Cut, Cap, and Balance Act,’ hoping to hold the US economy hostage to force through their radical and economically disastrous plan.

The ridiculousness of the absolute anti-tax forces has become especially clear in light of their unwillingness to repeal egregious tax loopholes, such those given to oil and gas companies, hedge fund managers, and many others.

Ironically, the purpose of these extreme cuts is to reduce the ongoing budget deficits, but in fact all of the plans under serious consideration by Democratic and Republican leaders would actually INCREASE the deficit. The problem is that lawmakers simply cannot make up for the outrageous $5.4 trillion cost of extending all of the Bush tax cuts.

Though things are not looking good, hopefully Democratic lawmakers will stand up and not let themselves be blackmailed into accepting ludicrous cuts to spending while large loopholes and tax cuts for the rich remain in place.

Photo via The White House Creative Commons Attribution License 2.0



New Fact Sheet from CTJ: Both Sides of Debt Ceiling Talks Propose Increasing the Budget Deficit



| | Bookmark and Share

President’s and GOP’s Positions Both Include Greater Tax Cuts than Spending Cuts

It’s hard to say what will happen with the necessary increase in the federal debt ceiling. But one thing is clear: Almost anything that the President and the Congress can possibly agree upon will not reduce projected budget deficits. Instead, it will increase them.

A new fact sheet from Citizens for Tax Justice explains the problem that both sides want to extend all or most of the expiring Bush tax cuts. And neither side has proposed spending cuts or tax increases large enough to offset the tremendous cost of such an extension.

Read the fact sheet.

Photos via Rusty Darbonne and Talk Radio News Creative Commons Attribution License 2.0



New from CTJ: Another Decade of Bush Tax Cuts Will Cost More than Twice as Much as the First Decade



| | Bookmark and Share

CTJ and others have noted that the cost of the Bush tax cuts from 2001 through 2010 was about two and a half trillion dollars. The recent “compromise” that extended them for another two years, through the end of 2012, cost $571.5 billion. But this is only the beginning. If Congress makes permanent the Bush tax cuts or extends them for another decade, the cost will be $5.4 trillion.

Read the fact sheet.



The Bush Tax Cuts After Ten Years



| | Bookmark and Share

bush tax cuts signing.jpgWill Nearly Double Budget Deficit if Continued, Mostly Benefit the Rich

State-by-State Fact Sheets

Ten years ago, on June 7, 2001, President George W. Bush signed into law the first of several tax cuts that drove the balanced budget he inherited from President Clinton deep into the red. Last year, Congressional supporters of Bush’s policies pushed through an extension of these tax cuts through the end of 2012.

  • Many lawmakers want to extend the Bush tax cuts again into 2013 and beyond, which would almost double the federal budget deficit.
  • 47.2 percent of the benefits of this tax cut extension would go to the richest five percent of the nation’s taxpayers.
  • The richest one percent would receive an average tax cut of $68,079 in 2013.
  • The poorest 60 percent of taxpayers would receive an average tax cut of just $487 in 2013.


See the national data and state-by-state fact sheets.



CONGRESS PAYS THE RANSOM: TAX CUTS FOR MILLIONAIRES



| | Bookmark and Share

This week, Congressional Democrats found that they could not enact policies that economists find to be the most effective economic stimulus (extended unemployment benefits, tax cuts for low-income families) unless they gave into Republican demands to also enact something that provides virtually no economic stimulus — tax cuts for millionaires.

It would be difficult to explain to a high school social studies class how this happened. The majority of Americans want the Bush tax cuts for the rich to expire. The majority of the House of Representatives and the Senate feel the same. So does the President of the United States. In fact, Barack Obama campaigned on allowing the Bush tax cuts to expire, as scheduled, but only for income in excess of $200,000 for unmarried taxpayers and $250,000 for married taxpayers. Over 80 percent of the revenue savings from Obama's (original) plan would have come from millionaires.

And yet, the House and Senate approved legislation to extend the Bush tax cuts for even the very richest taxpayers for two years. This turn of events is a stunning victory for those who want to continue the economic policies of George W. Bush — policies that are as discredited as any could possibly be.

Before the compromise negotiated by President Obama and Republican leaders was accepted, the House passed a bill based on President Obama's original tax plan. The Senate tried to as well but it was filibustered by Senate Republicans. That means Senate Republicans voted against a full extension of the Bush tax cuts for 98 percent of taxpayers and a partial extension for the two percent with incomes above the $200,000/$250,000 threshold.

Senate Democrats then voted on their tax plan again, except with the threshold raised to $1 million, and Republicans filibustered that as well. Republicans literally blocked tax cuts for all Americans in order to secure larger tax cuts for millionaires.

The Senate operates under rules in which a bill supported by 59 percent of the chamber does not have enough votes to pass. This gives a distinct advantage to whichever party is willing to block any and all legislation even if the result will be economic catastrophe. Conversely, it creates a serious disadvantage for whichever party is committed to avoiding that catastrophe at all costs. It's a bit like a hostage situation, in which one party cares about the life of the hostage and the other does not.

And so, the Democrats, committed to providing extended unemployment insurance benefits for an additional 13 months and extending tax cuts for low- and middle-income families, were forced to give into the demands of Republicans who were willing to allow the extended UI benefits to end and were willing to allow tax cuts to expire for families at every income level.

Of course it's true that some of the tax breaks in the compromise plan go to low- and middle-income people. But, as our report explains, over 38 percent of the tax breaks next year will go to the richest 5 percent of taxpayers. Over 25 percent of the benefits will go to the richest one percent — and that's more than will go to the entire poorest 60 percent of taxpayers.

The procedural rules of the U.S. Senate have made that chamber the greatest embarrassment of the democratic world. Meanwhile, the House of Representatives will be controlled for the next two years by politicians who purport to believe that cutting taxes causes government revenue to increase. The political debate is driven by pundits who think that the federal budget crisis will be solved by the coming together of the two parties — even though one of those parties has made it clear that they will only accept a budget overhaul that reduces revenues rather than increases them.

Our sole hope lies in our ability to convince the public that the plans offered by anti-tax, anti-government lawmakers will devastate public investments that American families depend on while enriching the wealthiest Americans. We have pointed out again and again and again that their plans are a disaster for tax fairness and fiscal responsibility. Our work has only just begun.



CTJ's Online Tax Calculator, State-by-State Figures, on the Compromise Tax Plan



| | Bookmark and Share

Citizens for Tax Justice has updated its online tax calculator to illustrate how the compromise tax plan approved this week by the House and Senate would impact families of various sizes and income levels.

Go to CTJ's online tax calculator.

 
This calculator can tell you how a taxpayer with specific characteristics would do under the compromise plan and under the other proposals that lawmakers have considered. Unlike other online calculators, this one tells you where the particular taxpayer falls on the income ladder, what fraction of the tax cuts go to taxpayers at the same level or lower, and what fraction of the tax cuts go to taxpayers with higher incomes.

For more information about the compromise tax plan, including an explanation of the provisions included and state-by-state estimates of the impacts on different income groups, see the report we released last week.



Report from CTJ: Compromise Tax Cut Plan Tilts Heavily in Favor of the Well-Off



| | Bookmark and Share

(Includes state-by-state figures)

A new report from CTJ finds that the compromise tax plan agreed to by President Obama and congressional Republicans would provide more than a quarter of its tax cuts to the best-off one percent of all Americans. That’s almost double the share of the tax cut that the President proposed to give the highest earners.

At the same time, the new tax plan would reduce taxes, and increase the budget deficit, by $424 billion in 2011 alone. That’s 40 percent more in tax cuts than the $301 billion tax cut the President had earlier proposed.

Read the report.

House Democrats voted in a closed-door caucus meeting on Thursday to not take up the compromise deal, which also includes a 13-month extension of expanded unemployment benefits, until changes are made to the tax provisions. Meanwhile, the Senate is debating the compromise today.

Under the compromise plan:

- The wealthiest one percent would get an average tax cut in 2011 of almost $77,000 compared to current law (under which all of the tax cuts enacted since 2001 are scheduled to expire). That’s almost triple the $29,000 tax cut that President Obama proposed to provide to the top one percent.

- Meanwhile, the lowest-income fifth of all taxpayers, those making less than $20,000 a year, would get a smaller tax cut than the President earlier proposed. This is because the GOP-inspired, 2 percent temporary reduction in the payroll tax in the compromise plan offers low-income workers a considerably smaller payroll tax reduction than the President’s proposal to extend his “Making Work Pay” payroll tax cut. The Making Work Pay payroll tax cut entirely eliminated the 6.2 percent worker payroll tax on the first $6,450 in earnings ($12,900 for couples).

The payroll tax cut agreed to by the President and GOP leaders would also provide considerably less economic stimulus “bang for the buck” than the President’s earlier proposal, because it is largest for high earners, who are less likely to spend their payroll tax savings. The compromise payroll tax cut would cost an estimated $112 billion in 2011, double the $57 billion dollar cost of the President’s earlier proposal. But we estimate that $112 billion in added borrowing would stimulate only an extra $18 billion in consumer spending compared to the President’s earlier payroll tax cut plan.



House Republicans Vote En Masse Against Full Tax Cuts for 98% and Partial Tax Cuts for 2%



| | Bookmark and Share

Yesterday, after months of debate, the House of Representatives approved one of President Obama's campaign promises, to fully extend the Bush tax cuts for the 98 percent of taxpayers who are either married couples with adjusted gross income (AGI) below $250,000 or unmarried taxpayers with AGI below $200,000.

The bill, H.R. 4853, passed by a vote of 234-188, with only 3 Republicans voting in favor and 20 Democrats voting against.

House Republicans, despite their history of supporting tax cuts as a solution for every known problem, voted en masse against the bill, which extends the Bush income tax rate reductions for the first $250,000 of a married couple's income and the first $200,000 of a single person's income.

Democratic leaders in the Senate have scheduled a vote for Saturday on a bill introduced by Finance Committee Chairman Max Baucus that is also essentially based on Obama's tax plan. It is likely that all or nearly all of the 58 Senate Democrats will vote in favor of this bill.

But Republicans in the Senate threaten to filibuster Obama's tax plan because it only partially extends tax breaks for the richest two percent of taxpayers. Republican leaders have demanded a full extension for all taxpayers.

In other words, Republicans threaten to hold hostage a full extension of the tax cuts for 98 percent of taxpayers in order to protect tax cuts for the richest two percent.

While threatening to block consideration of tax bills not to their liking, Senate Republicans simultaneously refuse to proceed to any other legislation until the tax cuts and pending spending measures are dealt with. In the recent letter signed by all 42 Senate Republicans, the caucus promised to prevent the chamber from even debating any legislation until this happens.

The letter itself makes wildly inaccurate statements about tax cuts, which are refuted by CTJ's recent report on small businesses and tax cuts.

President Obama has taken the unfortunate tactic of negotiating with Republican Congressional leaders before Congress even attempts to vote on his original tax plan. Formal negotiations are taking place between OMB Director Jack Lew, Treasury Secretary Timothy Geithner, and Congressional leaders.

Democratic leaders in Congress want to at least demonstrate that their party favors allowing the tax cuts for the richest 2 percent to partially expire and force the Republicans to explain why they would block a full extension of tax cuts for the other 98 percent.

If the two parties eventually come to a compromise, it is possible that it would involve an extension of the expanded unemployment program, which just expired, through the end of next year. Most economists agree that jobs will remain scarce well into next year and that UI benefits are effective economic stimulus because they put money in the hands of those most likely to spend it right away.



Call Your Senators Now and Tell Them to Let the Tax Cuts for the Rich Expire



| | Bookmark and Share

Tell them it's outrageous that some lawmakers want to hold hostage tax cuts for 98 percent of taxpayers in order to protect tax cuts for the richest 2 percent.

Tell them it's outrageous for lawmakers to say we can't afford to extend unemployment insurance for people laid off through no fault of their own — even as these same lawmakers support extending the Bush tax cuts for the very richest Americans!

Simply click here, fill in your phone number and you will receive an automated call that directs you to the Capitol switchboard. The switchboard can direct you to your Senators even if you're not sure who they are.



New Report from CTJ: Married Couples Earning $250k-$300k Would Lose Only 1% of Their Bush Tax Cuts under Obama Plan



| | Bookmark and Share

There seems to be a lot of confusion in the media and among the public about President Obama’s plan to let the Bush income tax cuts expire for joint incomes above $250,000 and single incomes above $200,000. Many people seem to think that couples and singles who make more than these amounts will lose all of their Bush tax cuts. This is not even slightly true.

Read the report.



New Report from U.S. Chamber Watch & CTJ: The U.S. Chamber's Fight to Protect Its Richest Corporate CEOs' Wallets



| | Bookmark and Share

The U.S. Chamber of Commerce has lobbied heavily for Congress to make permanent all of the Bush tax cuts — even for the richest Americans — despite the fact that these tax cuts will ultimately hurt business far more than it could possibly help. Part of the explanation must lie in the personal interests of the CEOs who fund and run the Chamber. As this report from U.S. Chamber Watch and Citizens for Tax Justice explains, many of these CEOs would personally gain $700,000 to $1.7 million a year if the Bush tax cuts are extended.

Read the report.



TELL CONGRESS: Don't Choose Tax Cuts for the Rich Over Help for the Unemployed



| | Bookmark and Share

Call your members of Congress.

Send an email to your members of Congress.

Republicans in Congress oppose extending the augmented unemployment insurance program for even three months — unless the $12.5 billion cost is offset with cuts in spending from the economic recovery act that was passed last year, which is keeping unemployment significantly lower than it would otherwise be.

Meanwhile, Congressional Republicans are demanding that the Bush tax cuts for the richest 2 percent of Americans be made permanent, at a cost of $700 billion over a decade — and they want this to be deficit-financed.

In other words, the party that will take over the House of Representatives next year believes that $12.5 billion for the unemployed is unaffordable but $700 billion for the richest two percent is absolutely vital.

Call and email your members of Congress NOW to tell them this is outrageous and unbelievable.

The Congressional Budget Office has found that extending income tax cuts, particularly for the rich, is the least effective of all the economic recovery measures Congress has debated, while unemployment insurance is the most effective because it puts money in the hands of people who will spend it immediately.

Economists expect unemployment to remain high for a lot longer than 3 months, so Congress needs to extend the augmented UI program for a full year. Congress has always provided  augmented UI during economic downturns, and has never cut off the extra help with unemployment as high as it is today.

There is reason for hope. Reports are trickling in that Democratic leaders will force a vote on a tax bill along the lines of what President Obama has proposed: Making permanent the Bush tax cuts for the first $250,000 of a married couple's income (the first $200,000 of a single person's income). The tax cuts for income over those amounts would expire, which means the richest two percent of taxpayers would continue to enjoy some, but not all, of the tax cuts enacted under President Bush.

This proposal hardly sounds like a progressive dream, but it's the best chance for the President and his allies in Congress to take a stand against continuing tax cuts that only benefit the very richest taxpayers. See CTJ's figures comparing the President's tax plan to the Republican plan (including state-by-state figures).

Hold the Vote!

Congress needs to vote on this tax plan. If lawmakers who support tax cuts for the very rich oppose this plan, then they need to go on record opposing tax cuts for 98 percent of Americans because they are trying to protect tax cuts for the richest two percent. When Americans see how their lawmakers vote on this bill and on unemployment insurance, they will finally have a clear idea of who is represented in Congress.

Putting lawmakers on the spot in this manner is one way — perhaps the only way — to get them to do the right thing.



New Report from CTJ: The Bush Tax Cuts and Small Businesses



| | Bookmark and Share

Sometimes people accidentally say what they really mean. Bill Rys, spokesperson for the National Federation of Independent Business (NFIB), recently acknowledged to the Washington Post that President Obama’s plan to raise the rates for the top two income tax brackets would only affect a fraction of small businesses, but he argued that they are the largest firms and therefore the ones that are most likely to be hiring.

In other words, NFIB claims to represent all small businesses, but when it comes to its lobbying focus, it really represents only the largest few. A new report from CTJ explains that, despite NFIB's claims, President Obama's tax plan will have little or no impact on any enterprise that can reasonably be called a "small" business.

Here are five points explained in the report:

1. Very few business people (3 to 5 percent) are rich enough to lose any portion of their tax cuts under Obama’s plan.

2. Of the business owners who would pay higher taxes under Obama’s plan, those with the very highest incomes cannot reasonably be called “small” business owners.

3. A person who receives their income from a business they own would have to receive over $250,000 (or over $200,000 if unmarried) in net profits in order to lose any part of their tax cuts under President Obama’s plan.

4. In order to hire people, business owners need customers, not tax cuts.

5. Claims that the richest 2.1 percent (who would lose some of their tax cuts under Obama’s plan) account for a fourth of all consumer spending are incorrect.

Read the report.



CTJ Updates Online Tax Calculator



| | Bookmark and Share

Citizens for Tax Justice has updated its online tax calculator to include all of the likely scenarios for tax policy in 2011. The calculator tells you what your taxes will look like in 2011 if:

1. All the Bush tax cuts expire (which no one expects to happen),

2. Congress enacts President Obama's proposal to extend the Bush tax cuts completely for 98 percent of taxpayers along with some additional tax cuts that were included in the American Recovery and Reinvestment Act (ARRA).

3. Congress enacts legislation to extend those parts of the tax cuts exempt under the PAYGO law (the tax cuts exempt under PAYGO are similar to, but not exactly the same as, the tax cuts in President Obama's proposal),

4. Congress extends all the tax cuts enacted under President Bush and none of the tax cuts in the recovery act. (This is the Republican proposal, S. 3773, as introduced by Senator Mitch McConnell.)

See CTJ's online tax calculator.



Long Hostage Standoff Over Tax Cuts



| | Bookmark and Share

Republicans Hold Tax Cuts for 98% of Taxpayers Hostage to Pass Tax Cuts for the Richest 2%... and Democrats Pass Up a Clear Shot at the Hostage-Takers

Democrats in Congress have decided to wait until after the election to act on President Obama's proposal to extend the Bush tax cuts entirely for 98 percent of taxpayers and let them partially expire for the richest 2 percent.

For months, Republicans have made it clear that they would try to block passage of tax cuts for 98 percent of taxpayers unless they could secure an extension of all of the tax cuts for the richest 2 percent as well.

Numerous polls show that significant majorities of Americans believe that the tax cuts for the richest two percent (those who are married and have adjusted gross income over $250,000 or unmarried and have AGI over $200,000) should expire. And mainstream economists agree with the findings of the Congressional Budget Office that income tax cuts for the rich provide less economic stimulus per dollar of cost than any other measure that Congress has considered.

While some Democratic members of Congress have said they would vote for a Republican alternative to extend tax cuts for all taxpayers, it seemed such a bill or amendment would never pass the Senate, where 60 out of 100 votes are needed to approve most legislation.  It seemed that all the Democrats, and perhaps some Republicans, in the Senate would vote for the President's plan to extend the tax cuts fully for 98 percent of taxpayers if that was the only option left.

Prospects in the House were less clear since bills and amendments are approved in that chamber with only a bare majority of votes. On the other hand, even House GOP leader John Boehner said he would vote for President Obama's tax plan if that was the only alternative available.

Despite all of this, Democratic leaders in both the House and Senate decided to wait until after the election to address the matter. To be continued...



CTJ's Reports on the Debate Over the Tax Cuts



| | Bookmark and Share

Over the past several months, Citizens for Tax Justice has published several reports to explain the various issues involved in the debate over which parts of the Bush tax cuts should be extended.

Comparing President Obama's Tax Plan and Senate Republicans' Tax Plan (with state-by-state fact sheets)

CTJ's recently updated reports on competing approaches to the Bush tax cuts compare S. 3773, the proposal introduced by Senate Republican Leader Mitch McConnell to make the Bush tax cuts permanent, and President Obama's proposal to make them permanent for all but the richest 2 percent of taxpayers. The main report includes tables showing the percentage of taxpayers in each Congressional district who are rich enough to lose some portion of the Bush tax cuts under Obama's plan. The tables also show the percentage of taxpayers in each district who have adjusted gross income in excess of $1 million. (About 80 percent of the revenue savings from Obama's plan would come from these taxpayers.)

Also included are state-by-state fact sheets illustrating the distribution of the two tax plans across income groups in each state.

Read the report and the state-by-state fact sheets.

 

Most House Democrats Supporting Tax Cuts for the Rich Have Lower than Average Percentage of High-Income Households in Their Districts

Last month, 31 House Democrats signed a letter to House Speaker Nancy Pelosi in support of extending the Bush tax cuts for all taxpayers, and thus opposing President Obama's proposal to allow the tax cuts to expire for the very rich. New data from Citizens for Tax Justice show that two-thirds of the House Democrats who signed that letter represent districts that have less than the average share of taxpayers rich enough to face higher taxes under President Obama's plan. Further, the claim made in the letter that these very rich taxpayers "are responsible for 25 percent of national consumer spending" is simply incorrect.

Read the report.

 

Group of House Democrats Support Tax Preferences for Wealthy Investor Class that President Reagan Ended

Forty-seven House Democrats have reportedly written a letter to Speaker Nancy Pelosi calling for an extension of the Bush tax cuts on investment income for the richest two percent of Americans. These Democrats would preserve the historically low income tax rate of 15 percent for capital gains and stock dividends for the wealthiest taxpayers. This stance places them to the right of Ronald Reagan and illustrates a surprising lack of familiarity with history and economics.

Read the report.

 

Congress About to Give Away the Farm

Word on the street is that the Senate is considering including an unlimited farm exclusion from estate tax when it addresses the expiring Bush tax cuts. This report explains how this provision is not likely to help true family farms as much as extremely wealthy families who want to shelter their assets from the estate tax.

Read the report.

 

Allowing the Bush Dividends Tax Cut to Expire for the Richest 2% Will Not Harm Seniors

Douglas Holtz-Eakin, chief economic adviser for John McCain's presidential campaign and former director of the Congressional Budget Office, recently told the Senate Finance Committee that seniors at all income levels would be hurt if Congress did not make permanent the income tax cut enacted under George W. Bush for corporate stock dividends. As this report explains, only those seniors who are among the richest 2 percent of taxpayers would lose any portion of the Bush income tax cuts.

Nonetheless, Holtz-Eakin claims seniors at all income levels will be harmed. His argument is that corporations would stop paying dividends because the wealthiest individuals receiving them no longer would receive a tax break for them. The former CBO director has overlooked the fact that two-thirds of the dividends paid by corporations are to tax-exempt entities, meaning they would have little, if any, incentive to change their practices for paying dividends.

Read the report.

 

Holtz-Eakin Peddles Myths about the Bush Tax Cuts

On July 14, Douglas Holtz-Eakin, chief economic adviser for John McCain’s presidential campaign and former director of the Congressional Budget Office, gave written and oral testimony to the Senate Finance Committee concerning the Bush tax cuts. To make his case, Holtz-Eakin endorsed several myths about the Bush tax cuts.

Read the report.

 

Some 44 House Democrats have reportedly written a letter to Speaker Nancy Pelosi calling for an extension of the Bush tax cuts on investment income for the richest two percent of Americans. These Democrats would preserve the historically low income tax rate of 15 percent for capital gains and stock dividends for the wealthiest taxpayers. This stance places them to the right of Ronald Reagan and illustrates a surprising lack of familiarity with history and economics.

Read the report. 



Extending Tax Cuts for the Rich Is Only the Beginning for the Tea Party



| | Bookmark and Share

While attending the second annual 9/12 Tea Party rally in Washington, one could not escape the focus by speakers and participants on tax policy. If there was one overarching theme of the rally, it was that the Obama Administration has sought to dramatically increase the size of the federal government by proposing and enacting dramatic increases in taxes and government spending. (For a reality check, remember that President Obama cut taxes for 98 percent of working Americans last year, proposes to leave the Bush tax cuts in place for 98 percent of taxpayers this year, and enacted a health care reform that reduces the deficit.)

What Tea Party rally attendees support is awfully murky, but what they oppose is clearer. They are against the healthcare reform, the bailouts, the recovery act that created so many jobs, cap and trade, and allowing any of the Bush tax cuts to expire. This opposition was taken to an extreme by some of the individual Tea Party attendees whose signs argued that allowing the tax cuts to expire is equivalent to sexually abusing children or that Obama’s expansion of government made him comparable to Hitler, the Soviet Union, or just a plain old socialist.

Deftly mirroring the anger of the crowd, Rep. Mike Pence (R - IN) elicited enormous cheers saying that “No American should face a tax increase in January, not one. We will not compromise our economy to accommodate the class warfare rhetoric of the American left or of this Administration.” In reality, it's the possibility of a Republican filibuster of President Obama's tax plan that might lead to all Americans having more income taxes withheld from their paychecks starting in January.

The disconnect from reality doesn't end there. The anti-tax rhetoric was not followed by substantive and fundamental calls for equally large decreases in government spending. There were no signs or speakers calling for the enormous cuts to Medicare, Social Security, or Medicaid that would be required to make lower taxes possible. There was certainly no articulation of what cuts would be needed to make up for the $700 billion in lost revenue if the Bush tax cuts for the wealthiest Americans were extended.

The sponsors and speakers of the rally also promoted extremely regressive and radical changes to the tax system. Freedom Works, the chief sponsor of the event, advocates replacing the current system with a single flat rate income tax, which was promoted by its representatives who spoke at the rally. In addition, several speakers also alluded to the need for a single national sales tax, which is also known as the "Fair Tax," to "fix" our tax system. Echoing both sentiments without specifying one over the other, the Tea Party-backed “Contract From America” states that the current tax system should be replaced with a single rate tax set forth in a law that is not longer than the Constitution.

As Citizens for Tax Justice demonstrated over and over and over again in the 1990’s, the single rate flat income tax proposed by Dick Armey (the leader of Freedom Works) would dramatically raise taxes on all but the richest Americans while also massively increasing deficits unless the single rate was much higher than proposed.

Similarly, the Institute on Taxation and Economic Policy showed in its 2004 analysis of the "Fair Tax" that it would actually increase taxes by an average of $3,200, or roughly 50%, for the average individual in the bottom 80% of income earners. In addition, in order to raise the amount of revenue currently being spent, the rate would have to be between 45% and 53%, rather than the 23% that flat tax supporters advocate.

While calls for the flat or "fair" tax incited some excitement, the crowd seemed more enthusiastic about basic calls for lower taxes or a simpler tax system rather than the radical tax changes advocated by the rally’s sponsors.

In both opposing President Obama’s policies and advocating for a regressive tax overhaul, the Tea Party leaders are attempting to get away with promising lower taxes and better government without facing the real consequences of specific policies.

Citizens for Tax Justice has updated its reports on the competing approaches to the Bush tax cuts to reflect the differences between S. 3773, the proposal introduced by Senate Republican Leader Mitch McConnell to make the Bush tax cuts permanent, and President Obama's proposal to make them permanent for all but the richest 2 percent of taxpayers.

CTJ has also, for the first time, added tables showing the percentage of taxpayers in each Congressional district who are rich enough to lose some portion of the Bush tax cuts under Obama's plan. The tables also show the percentage of taxpayers in each district who have adjusted gross income in excess of $1 million. About 80 percent of the revenue savings from Obama's plan would come from these taxpayers.

In case you don't have time to wade through all of these tables and figures, we'll give you the bottom line right now. In every Congressional district, only a small minority of taxpayers are rich enough to lose some portion of the Bush tax cuts under Obama's plan. The figure is less than 2% for a large majority of districts. It's over 5% in just 30 districts out of 436. Of course, the percentage of millionaires in each district is much smaller.

Read the report.



President Reaffirms Commitment to Extend Tax Cuts for 98%; House GOP Leader Fights for the Richest 2%



| | Bookmark and Share

Speaking in Cleveland on Wednesday, President Obama reaffirmed his commitment to making the Bush tax cuts permanent for 98 percent of taxpayers and allowing them to expire at the end of this year for the richest two percent. Responding to reports that Republicans will try to block his proposal, the President said,

"So let me be clear to Mr. Boehner and everyone else:  we should not hold middle class tax cuts hostage any longer.  We are ready, this week, to give tax cuts to every American making $250,000 or less."

This is an accurate description of the situation. Republicans are threatening to vote against a bill to extend tax cuts for 98 percent of taxpayers in order to secure tax cuts for the richest 2 percent. We would not call everyone among the bottom 98 percent of taxpayers "middle class," but we certainly agree that tax cuts should not be extended for any more people.

As CTJ has noted, the Bush tax cuts were disproportionately aimed at the richest taxpayers, who happen to be the only taxpayers whose income grew wildly over the past several years. Data from the non-partisan Congressional Budget Office indicates that nearly 39 percent of the income growth from 1979 to 2007 went to the richest one percent. That's more than went to the bottom 90 percent.

The Congressional Budget Office has also studied several different measures to create jobs and found that every measure it analyzed would create more jobs per dollar of cost than income tax cuts for the rich.

And yet, some members of Congress are determined to extend the tax cuts for the rich and will even block any bill that extends the tax cuts for everyone else.

The argument Republicans most often make is that many small business owners are among the richest two percent, and ending the tax cuts for these people will mean less job creation.

This argument is a red herring. Only 3 percent of taxpayers with business income (and only 5 percent of taxpayers who rely on business income for over half of their income) are rich enough to lose any of their income tax cuts under Obama's plan. These include many partners in law firms, accounting firms, hedge funds and other businesses we don't generally think of as "small" businesses. And even for those who do create jobs, there is no connection between income tax rates and hiring decisions. Businesses are not taxed on money they pay to their employees as wages, and small business owners are not taxed on income they reinvest in their businesses.

As President Obama pointed out, the only change that the richest taxpayers face is that income in the top two tax brackets will be taxed as it was at the end of the Clinton years.

"And for those who claim that this is bad for growth and bad for small businesses," the President said, "let me remind you that with those tax rates in place, this country created 22 million jobs, raised incomes, and had the largest surplus in history."

As a previous CTJ report (with state-by-state figures) explains, low- and middle-income taxpayers actually get a better deal on average under the President's proposal than under the Republican approach, because Obama would also make permanent the improvements in the Earned Income Tax Credit and Child Tax Credit that were part of the economic recovery act.



House GOP Leader Proposes to (Literally) Go Back to Bush Tax and Spending Policies



| | Bookmark and Share

The President's speech Wednesday was partially a response to the one made in Cleveland two weeks earlier by House Republican Leader John Boehner, whose five-point "plan" to help the economy mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing President Obama's economic advisers.

As CTJ previously reported, Boehner attacked loophole-closing provisions in the recently enacted $26 billion jobs bill (H.R. 1586) by describing them as exactly the opposite of what they really are. The provisions end abuses of the foreign tax credit. These abuses allow U.S. corporations to enjoy a negative tax rate on offshore investment income, which creates an obvious incentive to shift operations, jobs and profits offshore.

Boehner wrongly claimed that H.R. 1586 "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."

On Wednesday, Boehner offered what some media outlets described as a "concession," which would be to freeze in place, for two years, all the Bush tax cuts and the spending levels in effect in 2008.

This would, of course, repeal several measures meant to address the economic crisis, including the economic recovery act enacted last year. The Congressional Budget Office recently concluded that the recovery act has created between 1.4 million and 3.3 million jobs, and increased the number of full-time-equivalent jobs by between 2.0 million and 4.8 million.

In one sense, Boehner's offer really is a concession, since the Republican position has until now been that the Bush tax cuts should be made permanent for all taxpayers, rather than extended temporarily. It's possible that Boehner made this move because he knows that his position on taxes is far more precarious than media reports suggest. Plenty of polls show that the majority of Americans want the tax cuts to expire for the richest two percent of taxpayers.

There's another problem for lawmakers who want to extend tax cuts for the rich. To get their way, they will have to vote against (or even filibuster, in the case of the Senate) a bill extending the tax cuts for 98 percent of taxpayers. President Obama was right when he described his opponents as holding tax cuts for most Americans "hostage" to protect tax cuts for the rich.

BACKWARDS BOEHNER

House Minority Leader Says that Loophole-Closing Provisions in Jobs Bill Would Push Jobs Offshore — When the Exact Opposite Is True

Speaking before business leaders in Cleveland on Tuesday, House Republican Leader John Boehner proposed a five-point "plan" to help the economy that mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing the President Obama's economic advisers. He also claimed that deviating from the Bush tax policies would hurt small businesses, which has already been refuted by CTJ and other experts.

Near the beginning of his speech, Boehner said that the $26 billion jobs bill recently enacted, H.R. 1586, "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."

That is literally the opposite of what the tax provisions in H.R 1586 do. The provisions in this jobs bill close existing loopholes that, to use Mr. Boehner's words, "make it more expensive to create jobs in the United States and less expensive to create jobs overseas."

In fact, these loopholes can result in U.S. corporations enjoying a negative effective tax rate on their offshore investment income. This creates a strong incentive for U.S. corporations to shift profits offshore, either through accounting gimmicks or by moving actual operations and jobs offshore.

The Foreign Tax Credit

The loopholes that were shut down relate to the foreign tax credit, which U.S. taxpayers take against their U.S. taxes for any foreign taxes they pay. The idea is that if an American earns some income in, say, the U.K. and pays taxes to the U.K. on that income, he or she should not have to pay all of the applicable U.S. taxes on that income also. In other words, the foreign tax credit is meant to avoid double-taxation of Americans' foreign income. U.S. corporations use the foreign tax credit for income they generate abroad, but the problem is that many have found ways to take foreign tax credits in excess of what they need to avoid double-taxation.

For example, U.S. corporations don't even have to pay U.S. taxes on any of their foreign income until they bring that income back to the U.S. (until they "repatriate" that income), which in many cases they never will. But many have found ways to take foreign tax credits on this foreign income — even though it's not even taxed in the U.S. Obviously, this has nothing to do with avoiding double-taxation.

This means the foreign tax credits are being used to reduce the corporations' U.S. taxes on its U.S. income. The corporations are taking more foreign tax credits than they even need to wipe out their U.S. taxes on that foreign income. This also means the offshore profits are effectively subject to a negative rate of taxation in the U.S.

It's hard to imagine a stronger incentive to shift investments — and in some cases, actual jobs — offshore. This incentive to shift investments offshore has been greatly reduced by H.R. 1586, the law Boehner criticizes.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

The corporate community has been remarkably effective at confusing everyone about this issue, partly because so few people understand it. Even the Peter G. Peterson Institute, named after and funded by the man who has become famous for lecturing America on budget deficits, issued a report opposed to the provisions that close these loopholes in the foreign tax credit. (See CTJ's response to the Peterson Institute.)

The Jobs Bill, H.R. 1586

The law that Congressman Boehner is criticizing, H.R. 1586, the Education Jobs and Medicaid Assistance Act, provides $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. The non-partisan Congressional Budget Office (CBO) has found that aid to states is one of the most effective measures to create jobs. (The income tax cuts that Boehner endorses, particularly income tax cuts for the rich, are the least effective measures for creating jobs, according to CBO's findings.)

Since the bill included the most effective possible job creation measures and offset the costs by closing tax loopholes that encourage U.S. corporations to shift profits and jobs offshore, it's about as close as Congress ever comes to a win-win proposal. We're glad that President Obama has signed it into law.



More Polls Show Majority Want Tax Cuts for the Rich to Expire, More Analysts Confirm that It Won't Hurt the Economy



| | Bookmark and Share

With Congress out of Washington for the August recess, more and more reporters and opinion makers are turning their attention to the enormous decisions on tax policy that await lawmakers when they return.

Anti-Tax Lawmakers Ignoring Public Opinion

The public supports President Obama's approach to the Bush tax cuts. A new CNN poll finds that only 31 percent of respondents think that Congress should extend the Bush tax cuts for the very rich as well as everyone else. This is in keeping with previous polls with similar results.

The main justification given by anti-tax lawmakers and activists for ignoring public opinion on this matter is that higher taxes on the rich, they claim, will hurt business investment and therefore hurt job creation. But a growing chorus of analysts agree that allowing the Bush tax cuts to expire for the rich will not harm the economy.

Anti-Tax Lawmakers Ignoring Rational, Informed Economic Analysis

For example, Allan Sloan, senior editor for Fortune and a columnist for the Washington Post, writes that "From the start of the income tax through 2003, dividends were taxed as regular income, and capital gains were treated far less favorably than now. Somehow both the republic and the financial markets survived. They'll survive higher rates, too."

Sloan provides a refreshingly calm approach to a subject that sends many people into hysterics: the impact of taxes on investment.

For example, he points out that the 2003 tax cut bill signed by President Bush "set dividend taxes for the high-bracket crowd at preferential rates for the first time and brought the rate on long-term capital gains to its lowest point since 1941, according to the tax publishing firm CCH. But that didn't exactly result in a bull market. According to Wilshire Associates, whose numbers I'm using throughout this column, the U.S. stock market rose only 14.6 percent from the May 5, 2003, tax cut through Obama's election on Nov. 4, 2008... That price gain, about 2.5 percent a year compounded, was less than half the historical rate."

In Sloan's view, the ups and downs of the stock market have little if anything to do with tax rates. He goes on to say, "Since Obama's election, the market has been very good. In fact, the market's 10.4 percent rise during Obama's first 100 days in office bested tax-cutting Ronald Reagan (a 4 percent gain for his first 100 days) and George W. Bush (a 2.3 percent loss for the equivalent period)."

Higher taxes on the very rich will not reduce their investment in stocks and bonds and also will not reduce their investments in their own businesses that they actively operate (as we have explained elsewhere).

When it comes to job creation, the non-partisan Congressional Budget Office agrees that the other measures that have been discussed in Congress (like aid to state and local governments and extended unemployment benefits) are many times more effective than income tax cuts for the rich.



National Organizations Demand That Congress Allow the Bush Tax Cuts for the Rich to Expire



| | Bookmark and Share

On Thursday, Senate offices received a letter calling for the expiration of the Bush tax cuts for the rich from Americans for Responsible Taxes, and coalition of non-profits, labor unions, faith-based groups and think-tanks. The letter was signed by 50 organizations including Citizens for Tax Justice.

President Obama pledged to allow the Bush income tax cuts to expire for the two percent of taxpayers who have adjusted gross income in excess of $250,000 ($200,000 for unmarried taxpayers). Democratic leaders in the Senate have indicated that they want to vote in September to extend the Bush income tax cuts for everyone else (the other 98 percent of taxpayers). Many Republican Senators are expected to oppose any bill to extend the income tax cuts for 98 percent of taxpayers because they will demand that they be extended for the richest two percent as well.

A few Senate Democrats have indicated that they would support extending the income tax cuts even for the rich for some period of time, but it is unclear whether they would go so far as to vote against any bill that extends the tax cuts for "only" 98 percent of taxpayers. Because of the bizarre Senate practice of requiring 60 votes to enact any legislation, it is conceivable that the Republicans would be able to block an extension of the income tax cuts for 98 percent of taxpayers over their opposition to allowing tax cuts to expire for the richest two percent.

The letter from Americans for Responsible Taxes points out that public opinion and the opinion of economists and analysts at the Congressional Budget Office (CBO) and elsewhere are firmly in favor of allowing the tax cuts for the rich to expire. CBO analyzed several policy options to create jobs and found that income tax cuts generally would be the least effective, and that income tax cuts for the rich would be particularly ineffective.

Technically, the approach being discussed by President Obama and the Democrats would extend the reductions in income tax rates for all but the top two income tax brackets. Those top two brackets would be adjusted so that no one with AGI below $250,000 ($200,000 for unmarried taxpayers) would fall within them. Limits on personal exemptions and itemized deductions would also come back into effect for taxpayers above the $200,000/$250,000 threshold.

The letter also points out that even the richest two percent of taxpayers (those who would be affected by the top two income tax rates) would benefit from the extended rate reductions in the lower brackets, so even the richest two percent would not entirely lose their income tax cuts.

The main Republican talking point to justify extending the income tax cuts for the richest two percent appears to be that any other approach will harm small businesses. However, reports from Citizens for Tax Justice, the Center on Budget and Policy Priorities, and the CBO analysis mentioned above, all explain why income tax cuts for the rich would not help small businesses to expand and create jobs.



Coming this Fall: Big Decisions on the Bush Tax Cuts



| | Bookmark and Share

After a schedule packed with recovery measures, health care, financial reform and job creation, members of Congress are finally turning their attention to the Bush tax cuts, which expire at the end of this year. President Obama and Democratic leaders in Congress propose to extend the Bush tax cuts for all but the richest two percent of taxpayers, those who make over $250,000 a year (over $200,000 for unmarried taxpayers).

Rumors are flying that Republicans would block such legislation — meaning they would block tax cuts for 98 percent of taxpayers — because they oppose allowing them to expire for the richest two percent. That will have interesting consequences, given that a large majority of Americans think that the Bush tax cuts should expire at least for those who make over $250,000 a year.

Previously released figures from Citizens for Tax Justice show that the Republicans' approach to the Bush tax cuts would result in a $54,000 break, on average, for the richest one percent of taxpayers. (State-by-state figures are also included).

A new op-ed written by CTJ and appearing in several papers today explains that the very Senators who have blocked relatively small job creation measures (which economists agree are more effective than tax cuts) are the same Senators who want to increase the deficit by a trillion dollars in order to extend the Bush tax cuts for the rich.

Read the op-ed.



New Report from CTJ: Douglas Holtz-Eakin Peddles Myths about the Bush Tax Cuts



| | Bookmark and Share

On July 14, Douglas Holtz-Eakin, chief economic adviser for John McCain’s presidential campaign and former director of the Congressional Budget Office, gave written and oral testimony to the Senate Finance Committee concerning the Bush tax cuts. Because these tax cuts expire at the end of 2010, Congress must decide which portions of them to extend or make permanent, and which portions should expire as scheduled.

Holtz-Eakin argued for permanently extending the Bush income tax cuts for the rich, while dropping expansions in the Earned Income Tax Credit and Child Credit that benefit working class people. He also oddly asserted that raising revenue will not reduce deficits. He went on to repeat some common misconceptions about businesses and their reaction to tax rates.

The overall thrust of Holtz-Eakin’s testimony was that taxes need to be lower on the rich (to encourage them to work, save and invest) and higher on the poor (to encourage them to work).

A new report from Citizens for Tax Justice explains that, to make his case, Holtz-Eakin endorsed several myths about the Bush tax cuts.

Read the report.

A Washington Post editorial earlier this week declared, "Senate Republicans, committed as they are to preventing the debt from mounting further, can't approve an extension of unemployment benefits because it would cost $35 billion. But they are untroubled by the notion of digging the hole $678 billion deeper by extending President Bush's tax cuts for the wealthiest Americans."

Well, that's a little unfair, because Congressional Republicans actually want to increase the deficit by a full trillion dollars by extending the Bush tax cuts for the wealthy.

The $678 billion is just the cost of making the Bush income tax cuts for the richest two percent of taxpayers permanent. (President Obama and Republicans agree that they should be made permanent for the other 98 percent.) Republicans have also been pushing for years to make permanent Bush's repeal of the federal tax on the estates of millionaires. This would add over $300 billion during the first decade when its costs would be fully felt, compared to Obama's more restrained (but still awfully generous) proposal to cut the estate tax.

As the Post explains, Senate Republican Whip Jon Kyl recently said that the cost of new spending should be offset, but the revenue loss from tax cuts should not. According to Talking Points Memo, Republican Senator Judd Gregg explained that new government spending is "growing the government" and therefore should be offset, presumably with cuts in spending, but tax cuts should not be offset.

Of course, deficit-financed tax cuts have to be paid for one day, and that could be done through tax hikes. Congressional Republicans might believe that Congress will be forced to shrink government when revenues decline, but that obviously didn't happen after the Bush tax cuts were enacted.

Senate Republicans Bring Back Supply-Side Economics

But the real prize for articulating their position goes to Senate Republican Leader Mitch McConnell. When asked about this, he replied, "That's been the majority Republican view for some time, that there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy."

That's right. The most powerful Republican alive believes that when Congress cuts taxes, the result is that revenues increase.

This is the extreme version of "supply-side economics." The basic idea behind this school of thought is that tax cuts can change incentives to invest so much that they result in huge economic growth, which results in increased incomes and therefore increased income tax payments that more than make up for the loss of tax revenue resulting directly from the tax cuts.

CTJ has already explored in great detail the empirical evidence against this idea, the people who promote it anyway, and the fiscal disasters that have resulted.

But don't take our word for it. President George W. Bush's own Treasury also concluded that tax cuts do not increase revenue or come close to paying for themselves.

Douglas Holtz-Eakin Contradicts McConnell

So have the Republicans obtained some new support for supply-side economics since then? Apparently not, since the Republican witness at Wednesday's Finance Committee hearing on the Bush tax cuts conceded that they did not pay for themselves.

Douglas Holtz-Eakin, former director of the Congressional Budget Office and an adviser to the presidential campaign of John McCain testified at the hearing in favor of making permanent all the Bush tax cuts (including those for the richest taxpayers). According to his written testimony (which he paraphrased during the hearing), making the tax cuts permanent would have a positive economic effect that would reduce the direct cost of the tax cuts by 22 percent.

We have no idea how he came to that figure. But Holtz-Eakin is the closest thing the Republicans have to a reasonable and credible economist who will promote their views. (Even though we think he's wrong about most of what he says, as we explained in the previous article.) Since Holtz-Eakin is the best economist the Republicans have on their side, one would think that Senator McConnell would get on the same page.

 

Read the report.

As Congress prepares to take up legislation to boost small business job creation in the following weeks, some lawmakers argue that the legislation must extend parts of the Bush tax cuts that benefit the very rich.

Two ideas along these lines are being discussed. One is to extend income tax reductions for the very rich, at least for taxpayers who can be somehow classified as “small business” taxpayers. The second is to eliminate most of the federal tax on the estates of millionaires. As the new CTJ report explains, both of these proposals would allow the rich to continue to enjoy most of the tax cuts they received under President Bush while doing nothing to create or protect jobs.

Extending income tax cuts for small business owners is unlikely to boost job creation because:

— President Obama has already pledged to extend the Bush income tax cuts for 98 percent of taxpayers. Only 3 to 5 percent of small business owners are wealthy enough to lose some of their tax cuts under President Obama’s proposal.

— Hiring decisions are generally not based on federal income taxes, but are based on whether or not there is demand for the goods or services that a business provides.

— Economists and analysts, including those at the non-partisan Congressional Budget Office, have concluded that extending income tax cuts would be the least effective of several policy options to create jobs.

— Enacting a “carve-out” or special break for “small businesses” would simply encourage all rich taxpayers to disguise their income as “small business” income.

Cutting the estate tax is also unlikely to boost job creation because:

— An even smaller percentage of small businesses would be affected by the federal estate tax under President Obama’s proposal.

— Those few small businesses affected by the estate tax already enjoy special breaks that make it more manageable for closely held businesses and farms.

— It is very unlikely that the estate tax causes millionaires (the only people affected by it) to work less or invest less and therefore create fewer jobs. If anything, the estate tax could have the opposite effect.

Read the report.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

 



President's State of the Union Address Acknowledges - Partially - the Problems with the Bush Tax Cuts



| | Bookmark and Share

"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.

The National Association of Realtors (NAR) and other groups representing the real estate industry have been a case study in special interest politics for some time. A quick glance a the Congressional Joint Committee on Taxation's tax expenditure report reveals that tax breaks related to housing cost over $100 billion a year, but that's not enough to satisfy NAR and its followers.

The Battles Over the "Carried Interest" Loophole

Two years ago, the Real Estate Roundtable (of which NAR is a member) hired Douglas Holtz-Eakin to defend the "carried interest" loophole, which basically allows those investing other people's money to pretend that they put up their own money, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (CTJ released a fact sheet debunking Holtz-Eakin's arguments.) The Obama administration continues to support closing the carried interest loophole.

The Homebuyer's Credit

In the last year of the Bush administration, the real estate industry managed to get Congress to adopt, as part of the economic stimulus law enacted in 2008, a $7,500 homebuyer credit that taxpayers would have to pay back to the IRS. This, year, they persuaded Congress to upgrade that to a $8,000 homebuyer credit that does not have to be paid back and that is available to taxpayers under certain income limits if they purchase a home before the end of November of this year.  

The homebuyer tax credit was estimated at the time of enactment to have a cost of $6.6 billion, but is actually on track to cost more than twice that.

Since the economic crisis was caused by inflated home prices, it is not at all clear how subsidies provided through the tax code to boost home prices could possibly be good policy. 

Ted Gayer at the Brookings Institution has written that:

"The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tag of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy."

Perhaps most alarming is the possibility that the homebuyer credit could become another "tax extender," the term used by Congressional staff and lobbyists to describe tax breaks that are ostensibly in effect for only a year or two, but which everyone believes Congress will extend again and again. NAR is, of course, pushing for Congress to extend the homebuyer credit.

Health Care

Perhaps the worst example of special interests fighting to block the common good is the real estate industry's interference in Congress's attempts to reform health care. Early this year, the Obama administration proposed to limit the value of itemized deductions for wealthy taxpayers to 28 percent as a way to raise revenue that would partially fund health care reform. CTJ found that this would affect only the richest 1.3 percent of taxpayers and would merely reduce some of the unfairness that occurs when Congress subsidizes certain activities (like home ownership and charitable giving) through the tax code. NAR, naturally, would have none of it, since this proposal would curtail the savings received by high-income taxpayers when they claim the itemized deduction for home mortgage interest.

In fact, NAR recently has come out against a much more scaled back version of this proposal, which would merely cap itemized deductions at 35 percent.

Currently, the top income tax rate is 35 percent, so the richest Americans can save, at most, 35 cents for each dollar of itemized deductions they claim. But the Bush tax cuts, which lowered the top income tax rate from 39.6 percent to 35 percent, will expire at the end of 2010. That means that in 2011, under current law, each dollar of itemized deductions claimed by a very wealthy person could result in almost 40 cents of savings. Capping itemized deductions at 35 percent would therefore merely freeze in place their current value after the Bush tax cuts expire and rates go back up.

NAR recently issued a statement saying that it opposes even this scaled back proposal to limit itemized deductions and that it "rejects in the strongest possible terms any proposal that would limit the deductions for mortgage interest and real property taxes." NAR is unabashed in its defense of subsidies provided through the tax code for families in the top income tax bracket.

Do the Realtors Oppose the Bush Tax Cuts?

But if the realtors believe that the very rich should receive 39.6 cents for each dollar of itemized deductions they claim, that seems to imply that they think the top income tax rate should revert back to the pre-Bush level of 39.6 percent. Their position seems to be that it is unacceptable for the richest Americans to only save 35 cents for each dollar they claim in itemized deductions. The only way for that number to go back up from 35 to 39.6 is for President Bush's reduction in the top rate to expire. Surprisingly, NAR and CTJ seem to have one position in common, albeit for vastly different reasons.



CTJ Report Confirms Obama's Statement on Costs in Health Care Address



| | Bookmark and Share

The Bush Tax Cuts for the Richest Five Percent Cost More than the President's Health Care Proposal

During his address to a joint session of Congress Wednesday night to explain his health care proposal, President Barack Obama noted that his plan would cost less than the Bush tax cuts for the wealthy, a fact demonstrated in a report released earlier this week by Citizens for Tax Justice.

"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."

President Barack Obama, Address to Joint Session of Congress, September 9, 2009


A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019). President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."

As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed.) In 2010, when all the Bush tax cuts are finally phased in completely, an incredible 52.5 percent of them will go to this wealthiest five percent of taxpayers.

Oddly, many of the lawmakers who claim to be concerned about the cost of the President's health care plan are the same lawmakers who supported the Bush tax cuts, despite their much greater costs.

Read the new report from Citizens for Tax Justice.
 
These figures make clear that costs cannot be the real concern of lawmakers who oppose health care reform and yet supported the Bush tax cuts. Their position seems to be that showering benefits on the wealthiest five percent of taxpayers and leaving the bill for future generations is preferable to making health care available for all at a much lower cost and paying that cost up front. That demonstrates a different set of priorities than most Americans have, but it doesn't demonstrate much concern about costs.



House and Senate Approve Final Budget Resolution



| | Bookmark and Share

Approval Marks a Major Step Towards Enacting President's Agenda

On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President's major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.

The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.

Tax Cuts Extended for All but the Rich

For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush's cuts in the estate tax were enacted.

The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them -- on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.

Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).

For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.

Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.

Final Budget Leaves Out the Senate's Outrageous Estate Tax Cut

Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy." His common sense view carried the day as negotiators hammered out the final resolution.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees in March both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted in favor of the amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment called for a $10 million exemption for married couples and a 35 percent rate.

Taking Steps Towards Enacting the President's Priorities

Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as "reconciliation" which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.

The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate's members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President's important initiatives.

Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.

The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.

Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to "ram through" the President's agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.

Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes.



New CTJ Fact Sheet: Do the Rich Really Pay Over a Third of Their Income in Federal Income Taxes?



| | Bookmark and Share

As we approach April 15th, one complaint we often hear is that Americans who work hard and become successful have to pay over a third of their income in federal income taxes. But a recent report from the Internal Revenue Service (IRS) shows that this is not remotely true.

As a new CTJ fact sheet explains, the IRS data show that the federal income tax rates paid by the highest-income Americans have dropped substantially since 2000, largely due to cuts in the tax rates on capital gains and dividends pushed through by the Bush Administration. While income from work (salaries and wages) is subject to rates as high as 35 percent, income from investments (long-term capital gains and stock dividends) is taxed at only 15 percent.

The IRS report shows that in 2006 (the latest year for which data are available), the 400 richest income tax filers paid just 17.2 percent of their adjusted gross income (AGI) in federal income taxes. That is down from 22.3 percent in 2000, and is less than half of the top statutory income tax rate of 35 percent.

Read the CTJ fact sheet.



New State-by-State Figures on Tax Proposals in President's Budget from Citizens for Tax Justice



| | Bookmark and Share

This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.

Read the report. (State-by-state figures are in the final appendix.



New Report from Citizens for Tax Justice: President Obama's First Budget Proposal



| | Bookmark and Share

On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.

There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.

Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.

Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.

On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.

Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.

Read the Report



President Obama's First Budget: Not Perfect, But a Massive Improvement Over the Recent Past



| | Bookmark and Share

Revised March 4, 2009

On Thursday, President Obama sent his budget blueprint to Congress. While many of the details remain to be seen, it's the most progressive budget we've seen in years. It's also a more honest budget than the last administration ever proposed. For example, it doesn't pretend that the Alternative Minimum Tax (AMT) will expand its reach to tens of millions of additional taxpayers (which Congress never allows), and it includes the cost of the Iraq and Afghanistan wars instead of pretending that they will end this year.

It goes a long way towards making the tax system fairer and more progressive. The tax portion of the budget would allow the Bush tax cuts to expire for the very rich and includes revenue-raising provisions that are progressive, environmentally friendly and which, in some cases, would make the tax code simpler.

But the budget blueprint does muddle the cost of extending the Bush tax cuts for all but the top 2 percent of individual taxpayers by using a baseline that assumes the Bush tax cuts have already been made permanent, when in reality they are scheduled to expire at the end of 2010. (In other words, the Obama administration is using a baseline that assumes John McCain won the presidential election and his allies swept both chambers of Congress and were able to enact his tax policies!)

Continuing the Bush tax breaks for 98 percent of taxpayers and providing AMT relief will cost $2.6 trillion over the 10-year budget period. That's a steep price to pay for tax cuts that have not delivered their promised benefits. As the budget moves through Congress, we hope that the goal of long-term deficit reduction will prevail and the Bush tax breaks will be reduced even more. This could mean, for example, further raising the rates on capital gains and scaling back the cut in the estate tax. These changes would help move us towards the day when the government actually collects enough revenue to pay for the services it provides.

In addition to extending a lot of the Bush tax cuts and providing AMT relief, the President's budget would also provide around $770 billion in additional tax breaks targeted to working class people, plus over $70 billion in tax cuts for business. These are offset with several revenue-raising provisions, including a "cap and trade" program to limit carbon emissions, cleaning up the international tax system and eliminating loopholes for energy companies and other corporations.

These provisions are all included in the tax portion of the budget proposal. Other parts of the proposal include other revenue-raisers. For example, the budget includes a new provision that would limit the benefit of itemized deductions so that they could not reduce taxes by more than 28 percent (instead of, say, 35 percent for people rich enough to be affected by the 35 percent income tax rate). This provision would raise revenue to offset new health care spending.

This budget may not be perfect, but it does take several steps to find revenue to invest in our future and support working class families.

Next week, CTJ will provide a more detailed analysis of the President's budget and its tax provisions.

On February 13, Rep. Peter DeFazio (D-OR) and seven co-sponsors introduced a bill that would impose a tax on securities transactions. The 0.25 percent tax would be imposed on the value of the securities traded. Rep. DeFazio proposes the measure as a way to pay for the various Wall Street bailouts.

This proposal would, in theory, raise revenue from the folks who benefitted from the bailouts. But there's another proposal we like better. Congress should simply eliminate the loophole in the income tax for long-term capital gains and corporate stock dividends, which subjects these forms of income to a top rate of just 15 percent.

People who earn wages must pay income taxes at progressive rates as high as 35 percent, and the first $102,000 a person earns in a year is, in addition, subject to payroll taxes of around 15 percent. So allowing people who live off their investments to pay a tax rate of only 15 percent is grossly unfair. As Warren Buffet recently pointed out, he pays a lower tax rate that his secretary, thanks largely to the loophole in the federal income tax for capital gains and dividends.

And it truly is the wealthy who primarily benefit. A report issued by CTJ in May of last year found that 70 percent of the benefits of President Bush's tax cut for capital gains and dividends goes to the richest one percent of taxpayers. The report also cited IRS data showing that in 2005, this loophole cost the Treasury $91.7 billion.

So getting back to Congressman DeFazio's proposal, we find several advantages of a higher capital gain rate over a securities transaction tax:

  • Taxing capital gains at a higher rate would tax only those transactions that resulted in a gain, while a securities transaction tax would be imposed on every trade, whether or not there was a profit.
  • A higher capital gains tax rate would be imposed on all capital gain transactions, not just those that arise from exchange-traded securities transactions. (Many derivative transactions are not traded on an exchange.)
  • Taxing capital gains at ordinary tax rates would make the tax system much more fair and progressive. Taxpayers in the lower rate brackets would pay a lower rate on their capital gains while taxpayers in the higher brackets would pay a higher rate.
  • Taxing capital gains at the same rate as ordinary income would eliminate the many, many tax avoidance schemes that taxpayers use to convert ordinary income to capital gains.
  • Taxpayers would make decisions based on economics -- not on the tax treatment of different investments -- eliminating a lot of market distortion.

Unfortunately, many lawmakers feel a strong urge to expand the most egregious loophole in the federal income tax rather than repeal it. On the same day that the DeFazio proposal was introduced, Rep. Walter Jones (R-NC) introduced a bill to raise the capital loss limitation from the current $3,000 per year to $10,000 per year. This would provide another tax break for the wealthy. Generally, taxpayers can use capital losses to offset capital gains, and if they have net capital losses, they can deduct $3,000 of that against ordinary income. The rest is carried over to future years. If there were no limit, investors could choose to sell only assets that have a loss and offset other types of income, even though they might have unrealized gains in other capital assets. An October, 2008 CTJ report analyzed a similar proposal made by Senator John McCain (R-AZ) during his presidential campaign and criticized the idea for the same reason.

On Friday, January 23, House Republican Leader John Boehner (OH) and Republican Whip Eric Cantor (VA) presented their "Economic Recovery Plan" to President Obama. The Republican plan is based on income tax cuts for relatively well-off families and business tax cuts. As a brand new report from Citizens for Tax Justice explains, it is unlikely to provide the needed boost to consumption that economists believe can come from either direct government spending or putting money in the hands of working class people who are likely to spend it quickly.

Less Than a Quarter of the House GOP's Tax Rate Reduction Proposal Would Go to the Poorest 60 Percent of Taxpayers

The House GOP plan proposes to reduce the two lowest individual income tax rates from 15% to 10% and from 10% to 5%. To get the maximum tax cut of about $3,400 from this rate reduction, taxpayers would have to have enough taxable income to reach the start of the third income tax bracket. For example, a married couple with two children would typically need to earn more than $100,000. That's considerably more than most people earn. In fact, only one in five of all taxpayers has enough income to reach the third income tax bracket and receive the full benefit of the proposed tax rate reduction.

On the other hand, the plan proposed by Democrats in the House of Representatives (which is scheduled to come to a floor vote today), delivers tax cuts to working families who don't pay federal income tax but pay a lot in payroll taxes. For example, the "Making Work Pay Credit" would give married couples with $8,100 or more in wages the full $1,000 credit provided in the bill. In order to have an equivalent benefit from the Republican rate reduction, a married couple (with two children) would have to have $46,000 of gross income. The House Democrats' plan would also expand the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) which are smaller tax breaks in terms of revenue but are even more targeted to working families.

Read the new CTJ report.



AMERICA REJECTS TAX CUTS FOR THE RICH



| | Bookmark and Share

Charges that Progressive Taxes Are "Socialism" Fail to Rally Support for Candidate McCain

Senator Barack Obama, who ran for president partly on a platform of ending George W. Bush's policies of cutting taxes for the wealthiest Americans, will be our new president starting January 20, 2009. He will have the support of a House of Representatives and Senate led by opponents of the Bush tax cuts.

His opponent, Senator John McCain, tried several times to frame the tax debate in a way that would lead average Americans to support tax cuts for the very wealthiest taxpayers. None of these attempts succeeded. At one point, the McCain campaign tried to get the public to pay more attention to Obama's vote for a non-binding budget resolution than Obama's actual tax plan. Later, a McCain surrogate argued that allowing the expiration of tax cuts for the richest 1.4 million taxpayers would be a tax increase on 23 million business owners. Near the end, McCain made an argument implying that the EITC, and really any progressive income tax, was socialism. Americans were not impressed with these arguments.

The 2008 election has important lessons for lawmakers regarding taxes. Arguments that taxes must be lowered for even the richest Americans simply do not work. Americans don't buy it. Nor do Americans buy it when proponents of tax cuts attempt to blur the details about who would benefit the most. There has always been polling that shows Americans do not support any and all tax cuts, but it took an election to make this real for many lawmakers.

The Path Ahead

Some people may speculate about whether the new President will muster the support needed to enact the proposals dear to them. We also feel this uncertainty, but it is mitigated by the crucial fact that the Bush tax cuts expire at the end of 2010. To put it a different way, if Congress simply does nothing, we will return to the tax policies in effect during the Clinton years, when the economy performed better than it does now, and when Americans were generally more positive about the direction of the country. That would be fine with us.

We know that Congress is not likely to do nothing. Congress, with President Obama's leadership, may enact tax cuts, including extending the Bush tax cuts for those who are not rich. (Since such a gigantic share of the Bush tax cuts currently goes to the rich, Obama's proposal will lose much less revenue than would candidate McCain's proposal to extend them for even the richest families.) And Congress is likely to act on at least some of President Obama's proposals to enact brand new tax cuts for low- and middle-income Americans.

But those lawmakers who insist on extending the Bush tax cuts for the even the richest Americans have no cards left to play. Their cherished handouts for the rich expire in a couple years and the new president is not likely to sign any bill that extends this party for the most privileged.

Of course, a great many details must be worked out. Obama wants to repeal the Bush tax cuts before they expire for the very richest families, and some lawmakers will dig in their heels to oppose this. Another question is the extent to which new tax cuts will be paid for. While most analysts agree that balancing the budget is not a priority during a severe economic downturn, we certainly hope that Congress will not enact huge, permanent tax cuts without replacing most of the revenue -- revenue needed to fund health care initiatives and other investments that have been short-changed during the Bush administration. There are ways that Congress can raise revenue that go beyond what is included in Obama's tax plan, and we will be making these suggestions to the new administration. And of course there are some tax cuts that Obama supports that would benefit the wealthy -- like a partial extension of the Bush tax cuts for dividends and estates -- and we're going to have an interesting conversation about that.

But the most salient fact is that the surreal era of leaders telling us that taxes must be cut most dramatically for the wealthy is over. This is a sea change. We may have trouble explaining to future generations how such a bizarre ideology ever took hold. But we will have no trouble explaining that on Tuesday Americans looked at the long list of problems facing this country and decided that cutting taxes for the rich should not be considered a priority.

For eight years we have had a White House fixated on tax cuts for the rich, at the expense of all other priorities. Now, the millions of Americans who lack health insurance or who are underinsured, the newly unemployed, the families losing their homes, and Americans serving their nation in the armed forces all know that their struggles are finally back at the top of the agenda in Washington.

While presidential candidate John McCain has promised to make permanent the Bush income tax cuts for all Americans, his opponent, Barack Obama, promises to make them permanent for almost all Americans. A new analysis from Citizens for Tax Justice shows that only a small percentage of the taxpayers in each state would lose a portion of the Bush income tax cuts if Obama's plan is enacted. For these very rich taxpayers, Obama would repeal most of the Bush income tax cuts before their expiration date at the end of 2010. For everyone else -- for 97.5 percent of taxpayers nationally -- all of these tax cuts would be made permanent.

Obama proposes to make all of the Bush income tax cuts permanent for married couples with adjusted gross income (AGI) below $250,000 and unmarried taxpayers with AGI below $200,000.

Nationally, we find that only 2.5 percent of taxpayers will fall above the $250,000/$200,000 AGI threshold in 2009. The state with the largest percentage of taxpayers above this threshold is Connecticut (5.1 percent) and the state with the lowest is West Virginia (1.0 percent).

"Senator Obama wants to extend the Bush income tax cuts for 97.5 percent of taxpayers, and then enact more tax cuts for middle-income families," said CTJ director Robert McIntyre. "Obama even wants to extend a portion of the Bush income tax cuts for that richest 2.5 percent of taxpayers. Senator McCain defines a 'painful tax increase' as any plan that does not continue Bush's policy of giving huge tax cuts to these very richest taxpayers and having future generations of average Americans pick up the tab."



THE FAILURE OF SUPPLY-SIDE TAX CUTS



| | Bookmark and Share

The financial collapse and the economic downturn of the past months begs the question of whether the economic policies of the Bush administration will be repudiated. Supply-side economics, the ideology that has driven the economic agenda of President Bush, has survived for years despite its complete failure in practice. For example, some anti-tax lawmakers and activists now claim that the answer to the economic crisis is... more tax cuts for investors. But now that we have seen two presidents over the last thirty years run up massive budget deficits through supply-side tax cuts that did not seem to make the economy any stronger, there is reason to think that politicians may finally start to see the failures of this ideology.

The Supply-Side Theory

This issue of the Tax Justice Digest explores supply-side economics, which is generally the idea that policies, particularly tax cuts for investment or for those who invest, can change incentives to invest in a way that will yield huge increases in economic growth. Most incredibly of all, this resulting economic growth is often argued to result in so much new tax revenue that the tax cut can be cost-free or can even lead to increased revenues. Keep in mind there is no actual evidence that tax cuts can pay for themselves or actually lead to increased revenues. The Treasury Department under President Bush issued a report finding that there was no evidence for this, and Bush's current budget director has also said that tax cuts do not pay for themselves or lead to increased revenue. And yet, President Bush and many of his allies (including, recently, John McCain) have stated numerous times that tax cuts cause increases in revenue.

The Laffer Curve

This idea of revenue increases resulting from tax cuts -- the crown jewel of the supply-side belief system -- could of course be true in some conceivable context. The concept is illustrated by the Laffer curve, named after its creator, which is basically a diagram showing that tax hikes will increase revenues only up to a point, after which tax hikes will actually lead to a decrease in revenue because incentives to work and invest are so severely damaged. If profits are already taxed at 95 percent, raising that rate might, in fact, lead to less revenue, as people realize there is little to be gained from investing or running a business and there are consequently less profits to be taxed. Lowering that rate could instead lead to more business activity, more business profits, and even more taxes paid on business profits. (Or at the very least, more business profits might be reported, leading to more taxes paid.)

But supply-siders often take this idea, which might apply in very few situations in real life, and apply it to the United States today.

While this is the most bizarre form that supply-side economics takes, even the ideology's more mainstream adherents seem to believe that tax cuts will lead to economic growth that is so great that higher budget deficits and starved public services should be considered nothing more than a minor side-effect.

Lawmakers and Media: The At-Risk Community

When a person brings up the idea that a tax cut might lead to increased revenues, serious economists laugh, but lawmakers and reporters often find themselves strangely mesmerized. An idea that justifies offering constituents both a tax cut and higher spending on services is like a narcotic for some lawmakers, impossible to resist even though its ill effects are obvious to all observers. Meanwhile, reporters who find economics to be outside of their area of expertise give uncritical and expansive coverage to an idea that almost no serious economist actually believes in.

How It Began

The supply-side movement began with, to put it mildly, a colorful cast of characters, as Jonathan Chait describes in his excellent book, The Big Con. One is George Gilder, whose book Wealth and Poverty, helped launch the movement. He is also known for such quotes as "There is no such thing as a reasonably intelligent feminist," and he is a strong proponent of ESP (extrasensory perception). Another is Jude Wanniski, who wrote another important book (The Way the World Works) and preached that high taxes led to all evils, including Hitler's decision to invade his neighbors. He later compared Slobedan Milosevic to Abraham Lincoln and insisted that Saddam Hussein never gassed his people.

Then, of course, there is Arthur Laffer, who met with Wanniski and Dick Cheney one day, drew his diagram on a cocktail napkin and convinced Cheney that tax cuts could result in increased revenues. The Laffer curve was born, and progressives have been trying to throw it back into the fires of Mordor ever since.

Rather than dwelling on these interesting characters, we have decided to provide the following information for those who would like to know what supply-side economics is about, how it has influenced policy-making and how we can respond to it.

Two New Reports Explore the Strange Allure of Supply-Side Economic Policies and the Overwhelming Evidence of Their Failure

Supply-Side Ideas Influence the Presidential Race

Isn't It Time to Reassess the Bush Tax Cuts for Investment Income?

Supply-Side Disasters in the Making at the State Level

Two recent reports help explain supply-side economics, its logical inconsistencies and its failures in practice. One is "Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth" by Michael Ettlinger of the Center for American Progress and John Irons of the Economic Policy Institute. The report spends some time pointing out how supply-side economics is questionable even on a theoretical level. Do we really know that tax cuts always result in more work or more savings? What if you have a certain earnings goal or savings goal and you have to work or save less to reach that goal as the result of a tax cut? And how do we know more savings would mean more investment? Couldn't it lead to investment overseas, or maybe lower consumption which could in turn be harmful to the economy?

But things get even more interesting when Ettlinger and Irons look at the empirical evidence to compare economic performance after supply-side tax cuts during the Reagan and Bush II eras to economic performance after the deficit-reduction policies in the Clinton era. They look at the evidence in two ways: first, measuring economic indicators in a period immediately following the introduction of the new tax policy, and second, measuring economic indicators during the first economic expansion to take place after the introduction of the new tax policy. Investment is found to be stronger during the Clinton era than during the two supply-side eras. The same goes for GDP growth and several other indicators.

The second report is "Tax-Cut Snake Oil: Two Conservative Theories Contradict Each Other and the Facts," by Jeffrey Frankel at the Economic Policy Institute. Frankel adds to our understanding of the supply-side theory and the evidence that has discredited it after the tax cutting under Reagan and Bush II. He also adds a lot of interesting information about the key players involved. For example, he provides quotes from economists who worked for Reagan and George W. Bush saying that tax cuts cannot lead to increased revenues, as well as quotes of their bosses saying that they can.

But Frankel describes another development in the anti-tax movement that sits very strangely with supply-side economics: the "Starve the Beast" hypothesis put forward by many conservatives that cutting taxes will reduce revenues, run up deficits, and force politicians to shrink government. (This is put forward by those who believe shrinking the government would be inherently good.)

Frankel points out that it's not at all obvious why lawmakers would feel more constrained from spending under such a regime. Clearly, if constituents are told that increased spending might require tax increases now to pay for it, that might give some pause. But if taxpayers are told that increased spending will result in some future tax increase, that is surely less threatening to constituents and those who depend on their votes, and so there might be less pressure on lawmakers to limit spending. This is exactly what happens under the supply-side regime as deficits soar as a result of tax cuts. And of course, as Frankel points out, the Starve the Beast hypothesis should now be discredited by the explosive spending in the Reagan and Bush II eras.

Most amazing of all is that these two ideas -- cutting taxes is OK because it will lead to increased revenues, and, cutting taxes is good because it will lead to decreased revenues and thus smaller government -- somehow coexist within the same anti-tax movement.



Supply-Side Ideas Influence the Presidential Race



| | Bookmark and Share

Presidential candidate John McCain has made statements in the last year indicating that he believes tax cuts pay for themselves. Whether he actually believes this and how he came to this conclusion is all very murky. Senator McCain famously voted against the Bush tax cuts in 2001 and 2003 and has now reversed himself by favoring a permanent extension of all the Bush tax cuts even for the richest Americans, plus a lower rate for corporations and other cuts for business. When asked to explain his previous votes and his reversals, McCain has always given baffling and incoherent answers.

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don't think the governor's tax cut is too big-it's just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans-and that's not the kind of tax relief that Americans need."

But even if we take his word that he was concerned about the budget, wouldn't that only mean he would be even more opposed to the Bush tax cuts now that we have deficits instead of surpluses? He explained at a debate on September 5 that he voted against the 2001 and 2003 tax cuts because they did not include cuts in spending, which he thought were also necessary. But then he claims 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."

McCain claims he went from worrying about how tax cuts might damage a budget in surplus to believing tax cuts will help a budget that is in deficit. His conversion may be inexplicable, but it's very real. His tax plan would extend the Bush tax cuts for the rich and slash taxes for corporations, which would benefit stock-holders. He would create an alternative "simplified" tax that would generally make the tax code more complicated. Since it would be voluntary, people would calculate their taxes under the regular system and under the alternative system to see which yields a lower tax. Our estimates show that it would cost in the neighborhood of $98 billion in 2012, half of which would go to the richest one percent.

During his 2000 presidential campaign, Senator McCain said, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy. I'll use the bulk of the surplus to secure Social Security far into the future to keep our promise to the greatest generation."

So McCain once said he won't spend an entire budget surplus on tax cuts for the wealthy, but apparently he has no problem cutting taxes for the wealthy when the budget is in deficit. We would like to say this reversal is surprising but, sadly, we've seen it before.

What about McCain's opponent? One would hope that presidential candidate Barack Obama would represent a clean break with the supply-side thinking of the past, but the reality is slightly more complicated. During his speech at the Democratic convention in Denver, Senator Obama said, "Change means a tax code that doesn't reward the lobbyists who wrote it, but the American workers and small businesses who deserve it." Curiously then, Senator Obama proposes to keep in place a loophole for corporate dividends created in the Bush years. President Bush and his allies in Congress enacted a special loophole for dividends (a top rate of 15 percent) that will expire at the end of 2010 along with the rest of the Bush tax cuts if Congress simply does nothing. Instead of allowing the dividends loophole to completely expire, Senator Obama wants dividends to be taxed at a top rate of 20 percent for, roughly, the richest two and a half percent of Americans and a top rate of 15 percent for everyone else.

At the time the dividend tax cut was enacted in 2003, Michael Kinsley pointed out that "[u]nlike, say, interest on a savings account or money-market fund, which are taxed every year, corporate profits are allowed to compound tax-free until they are paid out as dividends or the stock is sold. A notorious quirk in the tax law wipes out a lifetime of taxes on stock that is passed on to your heirs. Dividends and capital gains are also exempt from the Social Security and Medicare taxes. One way or another, it is the rare dollar of corporate profits that bears a tax burden heavier than the burden on an employee's wages."

True, Senator Obama does want to allow tax rates on ordinary income to revert to the rates that existed under Clinton for the very richest Americans, and he will allow the tax subsidy for capital gains to shrink back to the level that existed under Clinton (a top rate of 20 percent instead 15). But apparently Obama agrees with President Bush that taxing dividends just like the income most people receive as wages would be either unfair, or damaging to the economy, or both.

Of course, Obama certainly has never claimed that tax cuts can pay for themselves. But the less insane aspects of the supply-side ideology have influenced some of what he has said about taxes. In particular, he seems to believe that not allowing most Americans to keep the taxes they received under Bush would be bad for the economy. He told the multitudes in Denver, "I will -- listen now -- I will cut taxes -- cut taxes -- for 95 percent of all working families, because, in an economy like this, the last thing we should do is raise taxes on the middle class." We could probably think of all sorts of things that would be the "last" thing we want to do in an economy like this (cutting back on education spending, allowing the health care system to plod along in its current inefficient manner) and that would be worse than having a higher tax bill.

So Obama is certainly not a supply-sider, but he's not exactly facing down the supply-siders either. Allowing everyone but the richest 2 and a half percent to keep the Bush tax cuts (and even extending some cuts for these very richest taxpayers) is not exactly a clean break with the failed supply-side policies of Bush. At the same time, his tax cuts would be aimed at the middle-class and would make the tax code more progressive overall, which would be an enormous improvement over the policies of the current president.

(See CTJ's recent report, "The Tax Proposals of Presidential Candidates John McCain and Barack Obama.")



Isn't It Time to Reassess the Bush Tax Cuts for Investment Income?



| | Bookmark and Share

It was bound to happen. In response to the crisis on Wall Street, some members of the Republican Study Committee in the House of Representatives proposed a familiar solution: tax cuts. In particular, they proposed a suspension of capital gains taxes for both individuals and corporations for two years, after which capital gains would be reduced from their current levels because "assets would be indexed permanently for any inflationary gains." The article from BNA that landed in our inboxes actually said that they proposed this measure "as a way to coax capital back into sluggish lending markets and offset the cost of a proposed government bailout of the U.S. financial system."

If suspending a tax altogether (that is, lowering its rate to zero) can increase revenue and offset the cost of anything, then supply-side economics may have risen above the laws of the known universe entirely into some new, unknown realm beyond our comprehension.

It would be comforting to believe that this thinking is confined to some small fringe group of lawmakers. Actually, the Republican presidential nominee is not far behind. John McCain recently proposed to temporarily slash the capital gains tax rate to a super-low 7.5 percent. (See CTJ's recent paper, "McCain's Proposal to Expand the Loophole for Capital Gains Would Be Unfair and Counterproductive.")

This seems like the ideal time to ask what exactly supply-side tax cuts for investment have accomplished. Bush expanded the tax subsidy for capital gains (lowering the special capital gains tax rate from 20 percent to 15 percent) and created a new one for dividends (which was taxed like any other income but is now taxed at a top rate of 15 percent). We do not know that the Bush tax cuts for investment actually contributed to the financial collapse. But the notion that they contributed to excessively risky investments and helped fuel the calamity is at least as reasonable as the notion that they helped grow the economy, considering our current economic situation.

There are several conceptual reasons why these tax subsidies for investment are simply not sensible policy. For one, it offends most people's idea of basic fairness that someone who earns $42,000 from work can be taxed at a higher rate than someone who receives the same amount of income by collecting dividend checks. Why someone like Paris Hilton, who probably lives off her wealth, should be taxed at a lower rate than someone who actually works has never been adequately explained by the proponents of these tax cuts.

But in addition to that, the subsidy leads to all sorts of shifty tax dodging behavior that makes the economy less efficient, since money is invested in certain activities or properties merely to get a tax break, rather than because it's the most efficient use of capital.

Supply-siders sometimes have their very best luck in convincing the naive to adopt their views when they're talking about the capital gains tax. Part of the reason for this is that capital gains tax revenues fluctuate wildly with economic cycles, rocketing upwards during the good times and crashing during recessions. The charts illustrating capital gains tax revenue have lines that look like rollercoasters, and supply-siders often confuse the unwary into believing that some cut in the capital gains tax rate caused one of the upswings.

For example, as a paper published earlier this year by CTJ explains, capital gains tax revenue crashed during the recession in 2001. This revenue of course climbed back up from that low point, as we would expect. But because this natural upswing coincided with Bush's cut in the capital gains rate from 20 percent to 15 percent, supply-siders (like the editorial board of the Wall Street Journal) argue that the Bush tax cut caused this revenue to increase. What they leave out of the story is the fact that capital gains tax revenue was higher at the end of the Clinton years, when the capital gains rate was higher.

The argument over revenues can seem like an arcane debate full of jargon and charts and tables, but the fairness problem posed by the loopholes for investment income is readily apparent. These loopholes direct a huge amount of money to the rich. Earlier this year, CTJ released a report finding that 70 percent of the benefits of the capital gains and dividends loopholes will go to the richest 1 percent of taxpayers in 2009. Of course recent events on Wall Street will lower the capital gains reported in 2009, but there is no particular reason why the distribution of the benefits from these loopholes would be any different. Unlike the supply-siders, we will resist the temptation to say that the coming change in capital gains tax revenue is a direct result of the Bush administration's policies. (Although the case could be made...)



Time to Stop Subsidizing Wall Street



| | Bookmark and Share

CTJ Report Calls on Congress to Close the Tax Loopholes for Capital Gains and Dividends

A new report from Citizens for Tax Justice argues that since Wall Street needed a government bailout that taxpayers have no interest in paying for, this seems like a good time to close the biggest subsidy currently enjoyed by Wall Street: The tax loopholes for capital gains and dividends. These loopholes subsidize people whose income results from investments rather than wages, as well as the Wall Street brokers who rely on their business.

President Bush and his allies in Congress significantly expanded a loophole for capital gains (which was previously taxed at a top rate of 20 percent and is now taxed at only 15 percent) and created a new one for corporate stock dividends (which used to be taxed just like any other income but are now also subject to a top rate of 15 percent). As the report explains, the result is that someone living off their wealth can pay taxes at a lower rate than someone who works for wages and has a lower income.

The report also refutes some misconceptions about these tax subsidies, including the "supply-side" idea that they somehow pay for themselves.

Closing these loopholes is not a particularly radical idea. President Reagan signed a tax reform law in 1986 that applied the same tax rates to all income, regardless of whether it took the form of wages or investment income.



FOX NEWS AGREES WITH CITIZENS FOR TAX JUSTICE!



| | Bookmark and Share

Fox News Anchor Demands that McCain Campaign Official Explain Why He Is Lying About Obama's Tax Plan

Think Progress caught Fox News anchor Megyn Kelly last week pushing back at McCain spokesman Tucker Bounds for defending his campaign's claims that Barack Obama intends to raise taxes on working-class people.

"But you guys have suggested he's going to raise taxes on the middle class and virtually every independent analyst who took a look at that claim said that's not true," Kelly said. "he'll raise it on people making $200,000 or $250,000, but not the middle class." When Bounds tried to defend his boss's honor, Kelly shot back, "I'm not giving him any credit. I'm saying what the independent analysts say. They say that claim is false."

Citizens for Tax Justice, along with many others, has made the same point in recent weeks. Last week CTJ released a fact sheet that refuted the McCain campaign's claims that Obama proposes "painful tax increases on working American families." Obama has proposed to repeal the Bush tax cuts for only married couples with incomes above $250,000 and singles with incomes above $200,000. Since the Bush tax cuts expire at the end of 2010 anyway, this means that for years after 2010, there would simply be no change in the law affecting taxpayers with incomes above those levels (except that a couple of Obama's tax cuts would benefit even these wealthy taxpayers). For everyone else, Obama proposes to extend the Bush tax cuts past 2010 and he also proposes a raft of new tax cuts targeting the middle-class.

Earlier this year CTJ found that only 2.1 percent of taxpayers have adjusted gross income (AGI) above $250,000 and only 3.2 percent have AGI over $200,000. Senator McCain has been telling crowds that "Senator Obama will raise your taxes." Unless Senator McCain is addressing only the richest 2 or 3 percent of Americans (which seems an unlikely campaign strategy) it's hard to avoid the conclusion that McCain has decided to mislead the public. In fact, it's so hard to avoid this conclusion that even Fox News has begun to accept it.

A new fact sheet from Citizens for Tax Justice clarifies some of the myths about presidential candidate Barack Obama's tax plan that have been perpetuated by the campaign of his opponent, John McCain. While CTJ does not think that new tax cuts will improve the lives of ordinary Americans, we do feel that the public should receive accurate information about the tax cuts both candidates are offering.

President Bush and his allies in Congress enacted tax cuts that are scheduled to expire after 2010. Obama would repeal the Bush tax cuts for the richest 2 or 3 percent, which means that for years after 2010 there would simply be no change in the law for these taxpayers. For everyone else, Senator Obama would change the law to make the Bush tax cuts permanent, and he also proposes many additional tax cuts for the middle-class. Even the richest taxpayers would enjoy some tax cuts under Obama's plan after 2010 that they would not receive under current law (a partial extension of the cut in the estate tax and a partial extension of the loophole for dividends).

Senator McCain voted against the Bush tax cuts but now insists that they must all be made permanent for all Americans regardless of how rich they are. The fact that Obama would not make them all permanent for the richest 2 or 3 percent has been falsely presented by the McCain campaign as "painful tax increases on working American families."

Both candidates also propose additional new tax cuts, but Obama's target low- and middle-income families while McCain's generally target businesses and corporations.

Read the fact sheet.

A recent Wall Street Journal editorial touts new figures from the IRS as evidence that the rich are actually paying a higher share of federal taxes under President Bush and that the tax code has, therefore, become more progressive over the past eight years.

The Journal uses the IRS figures to create the impression that the poorer half of Americans are contributing almost nothing to federal revenue while the wealthy are providing the bulk of it.

Do the rich pay too much in taxes? Has the tax code become even more progressive as a result of the Bush tax cuts?

Of course not. As a new report from CTJ explains, the share of taxes paid by the rich looks large and growing only because the Wall Street Journal ignores the tax that affects the poor and middle-class most heavily -- the payroll tax.

The new CTJ report provides figures that combine both the federal income tax and the federal payroll tax into the total amount of federal taxes paid by each income group in 2007. The richest one percent does pay a large share of total federal taxes - 23.6 percent. But the richest one percent also receives a roughly equal share of total income in the United States, 22.4 percent. Further, the Bush tax cuts actually reduced the total share of federal taxes paid by the richest one percent.

Read the report.



New Report from CTJ: Bush Administration Demands that Congress Increase the Deficit with Tax Breaks for Business



| | Bookmark and Share

A new report from Citizens for Tax Justice examines the $54 billion tax cut bill that the President is threatening to veto because it includes revenue-raising provisions to offset the costs. The President's stance threatens a needed improvement in the Child Tax Credit for poor families with children, as well as several other tax changes sought by lawmakers.

The bill, (H.R. 6049) was approved by the House of Representatives on Wednesday and includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Similar bills passed during the Bush years resulted in increases in the federal budget deficit because they did not include revenue-raising provisions.

The Office of Management and Budget (OMB) issued a statement asserting that it would advise the President to veto the extenders bill if approved by both chambers in its current form. The main reason is that the legislation includes revenue-raising provisions to prevent it from increasing the federal budget deficit.

Equally alarming is the fact that the White House actually supports all of the most poorly targeted and unjustified tax breaks in the extenders bill, even while opposing any effort to pay for them.

But at least one of the tax cuts in the bill is a good idea. It would expand eligibility for the Child Tax Credit for one year, at a cost of $3.1 billion.

The report concludes that the President should champion provisions like this, which actually do make the tax code more progressive, as well as the responsible and fair revenue offsets that would raise enough money to pay for this and other tax breaks in the bill.

The report: http://www.ctj.org/pdf/extenders20080523.pdf



House GOP Pins Comeback Hopes on Social Security Privatization, Dismantling Medicare, and Slashing Public Services



| | Bookmark and Share

On Wednesday, Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, presented a comprehensive tax and entitlement plan that would cut Social Security benefits, end Medicare as it's currently structured and attempt to simplify taxes by creating an optional income tax that one could choose in lieu of the current system. The plan follows a string of losses of formerly Republican-held House seats in special elections and a general sense that Republican members of Congress want to improve their message.

One part of the plan would replace Medicare benefits with a "payment of up to $9,500 - adjusted for inflation and based on income, with low-income individuals receiving greater support." Another part of the plan copies a Bush proposal to offer tax credits - $2,500 for individuals and $5,000 for families - to purchases health insurance. Perhaps most surprising is the part of the plan that essentially revives the prospect of diverting money out of Social Security to fund private accounts.

The tax reform part of the plan would go much further -- and cost much more -- than the Bush tax cuts. The estate tax would be abolished (at a cost of a trillion dollars over a decade) and the AMT would be eliminated (which would cost $1.5 trillion over a decade), and taxpayers would get to choose to file under either the current income tax or a "simplified" income tax with rates of 10% on income up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts. The standard deduction and personal exemptions would be larger, totaling $39,000 for a family of four.

While many anti-tax lawmakers have suggested an optional simplified tax, it's not obvious how having two income taxes can be simpler than having just one. The most likely result is that people would calculate their taxes twice to see which system offers them less tax liability. And of course, the reason why the simplified version must be "optional" is that all lawmakers claim to support simplification but can't bring themselves to really close down the various loopholes that benefit certain pockets of voters (and campaign contributors) and which actually cause the complexity in the tax code.

Interest, capital gains and dividends would no longer be taxed. (Most of the benefits of the current capital gains and dividends tax breaks go to the richest one percent.) The corporate tax would be replaced by business consumption tax of 8.5 percent.

The plan would allegedly eliminate the federal budget deficit, in part with a provision that would require the OMB to make across-the-board reductions in discretionary and mandatory programs if spending rises above a certain percentage of GDP "but applies the reduction only to fast-growing programs, and is limited to no more than 1 percent of a program's spending." But given the magnitude of the tax cuts included in this plan, it's difficult to imagine Congress ever paying for them by reducing spending, which did not occur even when Rep. Ryan's party controlled the House, Senate and White House.

A new report from Citizens for Tax Justice shows that the majority of the Bush tax cuts for capital gains and dividends go to the richest one percent of taxpayers in every single state. The report also explains that these tax cuts do not pay for themselves, despite arguments to the contrary.

Presidential candidates, reporters and pundits have lately perpetuated two myths about tax cuts for capital gains and dividends. The first myth is that the middle class benefits from these tax cuts for investment income. The second myth is that these tax cuts, particularly the tax cut for capital gains, have caused federal revenue to actually increase.

The first of these myths is easily refuted by looking at the distribution of the Bush capital gains and dividends tax cuts both nationally and on a state-specific basis. The state-by-state figures in the report show that in every single state, the benefits from the capital gains and dividends tax breaks are concentrated among the richest one percent. The average tax cut for these fortunate households runs in the tens of thousands of dollars, while the average tax cut for the poorest 60 percent is perhaps enough to buy a single meal, and in many states is even less.

Senator John McCain and other supporters of the Bush tax policies imply that these tax cuts are more important to the middle class than these figures would indicate. They argue that a large number of Americans have investment income, but they fail to mention that most of that is not taxable investment income.

The second myth is also easily refuted, by examining the actual trajectory of revenue from capital gains taxes as a percentage of GDP. The report shows that there is no evidence that the amount of revenues collected by the tax actually increases when the rate is cut.

CTJ's state-by-state capital gains data helped state nonprofits to inform policy debates in a number of states this week. The Oregon Center for Public Policy pointed out that the annual Bush capital gains/dividend tax cut for the very wealthiest 1 percent of Oregonians exceeds the cost of recently revoked federal timber payments for rural Oregon counties. Ocean State Action used the opportunity to highlight the inequity of Rhode Island's state-level tax breaks for capital gains, and the Iowa Policy Project, New Jersey Policy Perspectives and Policy Matters Ohio also highlighted the report's findings. If you're interested in using this data to inform your state's policy debate, drop us a line.



Proposed Surtax on Millionaires to Help Veterans Would Be a Tiny Sacrifice for the Richest 0.3 Percent



| | Bookmark and Share

On Thursday, the U.S. House of Representatives took votes on amendments to an emergency supplemental spending bill to fund military operations in Iraq and Afghanistan, to improve veterans' education benefits and to extend unemployment insurance benefits to get jobless Americans through difficult times.

One amendment that was approved would improve the educational benefits available to veterans by increasing them to match the highest public university tuition in a given recipient's state and providing a monthly housing stipend.

This improvement in veterans' education benefits would cost about $52 billion over ten years. To offset this cost, the legislation includes a small surtax on those who have most enjoyed the benefits of living in and doing business in America. The surtax of 0.47 percent (just under half a percent) would apply to adjusted gross income (AGI) over a million dollars for married couples and over half a million dollars for other taxpayers.

New figures from Citizens for Tax Justice show that in 2007 only 0.3 percent of taxpayers were rich enough to be affected by such a tax. Moreover, the sacrifice asked of them is tiny, equal to about 7 percent of their Bush tax cuts.

The surtax could be torpedoed several ways by lawmakers who want to preserve the Bush tax cuts for the rich. The vote on the actual war funding at the center of the emergency supplemental actually failed on Thursday, which could complicate matters when it comes time to negotiate with the Senate. Some Senators have expressed misgivings about whether their chamber would ever approve a surtax, and the Senate Appropriations Committee approved a version of the supplemental Thursday that has the war funding and the provisions to improve veterans' education benefits, but no surtax or any other revenue-raising provisions to offset the costs. The Bush administration predictably issued a veto threat against the surtax, as well as other provisions promoted by Democratic leaders.

"The surtax would scale back the Bush tax cuts for the richest 0.3 percent of taxpayers, by an average of just 7 percent, to help the men and women returning from the wars and their families," said Robert S. McIntyre, director of Citizens for Tax Justice. "Lawmakers who oppose this proposal will prove that they really do value tax cuts for the wealthy over all else."



McCain's Transformation Complete: Tax Cuts for the Rich, Even if We Cannot Pay for Them



| | Bookmark and Share

Last week Senator John McCain finally completed a process that has been underway for some time now. McCain has worked his way back into his party's good graces by coming out in support of running massive budget deficits to extend the Bush tax breaks and give new tax breaks to business.

It's difficult to remember now, but Senator McCain had said back in 2000, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy." He also said of the tax plan George W. Bush proposed while running for president in 2000, "Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans -- and that's not the kind of tax relief that Americans need."

The New John McCain

Let's compare this to the new John McCain, who fleshed out his latest ideas a bit more during a tax day speech in Pittsburgh.

McCain said he would extend the Bush tax cuts, even though over half of the benefits would go to the richest one percent and the cost would be $5 trillion over a decade. He would cut the corporate tax rate down from 35 percent to 25 percent, even though measured as a percentage of GDP, U.S. corporate taxes are among the lowest of any developed country. He would double the personal income tax exemption for dependents to $7,000, which would do the most for those families in higher income tax rates and nothing for low-income people who pay payroll taxes but who do not have taxable income (meaning a family of four with income of less than $25,000). He would abolish the Alternative Minimum Tax, even though about 9 tenths of it is paid by people with incomes over $100,000.

He would enact first-year deduction or "expensing" of "equipment and technology investments, which, along with a lower corporate tax rate, will create new opportunities for tax sheltering by the wealthy. He would ban internet and cell phone taxes permanently because he seems to believe that new technologies need to be granted a waiver from taxes that lasts forever. (If only Thomas Edison had thought to lobby for laws shielding his inventions from taxes.) He would make permanent the research and development credit because he believes innovation comes from the private sector, except not really, because apparently he also believes that no one will invent anything unless we give them a subsidy through the tax code.

And, most tantalizingly, he would offer a simplified alternative income tax that people can choose, at their option, to file. It's optional, presumably because everyone claims they want a simpler tax form but no one can agree on actually giving up the various deductions and credits that make filing ones' taxes complicated. Rather than simplifying tax filing, this will probably lead some people to calculate their tax liability under two different systems to determine which will result in lower taxes.

Massive Cuts in Public Services Would Be Necessary to Pay for McCain's Tax Plan

The Tax Policy Center has calculated that McCain's plans would cost $553 billion in 2012 alone. That's not even including the interest payments on the additional debt that will result, but let's put that aside for a second. McCain claims he can avoid increasing the national debt, at least to a degree, by cutting spending. But the cost of his plan in 2012 is about 17 percent of all projected federal spending that year according to estimates from the OMB (on page 134 for anyone interested). That's a whole lot of spending to cut. Looked at another way, it's more than all the non-defense discretionary spending that year and about equal to discretionary spending on defense.

During his Pittsburgh speech, McCain said he could get $100 billion in "savings from earmark, program review, and other budget reforms" but was not any more specific. The Senator's oft-mentioned earmarks are said to account for only around $18 billion at the most.

McCain has also said that he will obtain $30 billion in revenue by closing corporate tax loopholes. But his corporate tax cut alone is estimated to cost $143 in 2012.

Actually, You Should Just Bill My Grandkids

Then finally, on Sunday, McCain said on ABC's "This Week" that his tax cuts would take priority over balancing the budget.

To get a sense of what a huge shift this is for McCain, remember that during presidential debates he tried to explain away his opposition to President Bush's tax cuts in 2001 and 2003 by claiming that he thought cuts in federal spending should have accompanied those tax cuts to ensure that the nation's fiscal health would not deteriorate.

Of course, what he said back in 2000 also touched on the fact that the benefits of the Bush tax cuts would go mostly to the rich, but the new McCain is apparently unwilling to remind anyone about this.

On "This Week," George Stephanopoulos asked McCain, "If Congress does not give you the spending cuts you say you can get, will you hold off on signing the tax cuts?"

McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."

It's worth pointing out that none of the candidates are actually talking about raising taxes (with the possible exception of the capital gains tax). Allowing parts of the tax cuts to expire exactly as the Republican House, Republican Senate and Republican White House wrote them to expire can hardly be called a tax increase. Further, it would be interesting to know how McCain might explain the prosperity that followed Clinton's tax increase or the economic doldrums that have followed George W. Bush's tax cuts.



President Bush Has Made Tax Day Easier for the Rich - at the Expense of Everyone Else



| | Bookmark and Share

A report released this week from Citizens for Tax Justice explains how "tax day" has changed under President George W. Bush. The answer for most Americans is: very little. Despite claims made by the President and his supporters, the tax breaks enacted after 2000 provide little benefit for the middle-class. However, for the richest one percent of American families, tax day is considerably easier. Once the President's tax cuts are fully phased in, the majority of the benefits will flow to this small group of lucky families.

What has changed for most Americans is the very real threat posed by the increased national debt resulting from these tax cuts. The national debt must eventually be paid off with tax increases or cuts in public services that Americans -- particularly the middle-class -- rely on.

The report explains that:

  • The tax cuts received by the typical American are nowhere near as large as the President and his supporters imply, and are in fact too small to make any difference in the life of a typical American family.

  • When the Bush tax cuts are fully phased in, the majority of the benefits will go to the richest one percent.

  • If the Bush tax cuts are made permanent, as the President proposes, the cost will be $5 trillion over the 2011-2020 period. To put that in context, the federal government collected $2.6 trillion in revenue last year.

  • The Bush tax cuts received by the richest one percent in 2008 will be more than the funding received by the Department of Education, almost twice as much as the funds received by the Department of Homeland Security and over ten times as much as received by the Environmental Protection Agency.



Charlie Gibson Repeats Misinformation at Democratic Presidential Debate



| | Bookmark and Share

ABC news anchor Charlie Gibson perpetuated a myth about taxes at the Democratic presidential debate on Wednesday night. Gibson said of the capital gains tax that "in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down." He asked Senator Obama, who has signaled that he would raise the capital gains tax from its current level of 15 percent to 28 percent, why he would bother doing this if it would actually reduce revenues.

There is just one problem. What Charlie Gibson said is not true. Revenues from capital gains do not rise when the tax is cut. They rise when the economy is booming and they collapse when the economy tanks. In fact, revenue from capital gains taxes is currently well below the peak it reached during the Clinton era ¢Â€Â” when taxes were higher.

A small group of ideologues associated with "supply-side economics" believes that tax cuts can actually increase revenues. While this notion is rejected by most mainstream economists and sounds ludicrous to the average person, members of the media and Congress seem unusually susceptible to being hoodwinked into believing it. Their general idea is that if we lower capital gains taxes, there will be more capital gains realizations (meaning more people sell their property that has gone up in value) because the tax on that profit has been cut, and this will lead to revenue increasing overall.

Even if there are more realizations as a result of a capital gains tax cut, the resulting revenue will be nowhere near enough to make the tax cut budget-neutral, much less revenue-enhancing.

The ups and downs in revenue collected by the capital gains tax seem to have more to do with what's happening in the broader economy than with tax policy. In the early and mid-1990s, when the top capital gains tax rate was 28 percent, the revenues collected by the tax shot through the roof. They continued to climb after the rate was lowered to 20 percent in 1997, but this looks more like the continuation of a preexisting trend linked to economic prosperity rather than a response to the change in the rate. Then in 2001 and 2002 the revenues collected by this tax fell precipitously. This was not following any change in tax policy at all, but clearly linked to the bursting of the dot.com bubble and its ramifications on the stock market.

Capital gains tax revenue did increase after 2003, when the rate was cut again to 15 percent, but we would expect the revenue to rise from the low point of the recession, regardless of what changes were made to the tax code. More importantly, the revenue obviously has not reached the high level of the Clinton years when the rate was higher. Measured as a percentage of GDP, the capital gains tax will probably collect only half as much revenue this year as it did in 2000, when the rate was higher.

Can support for the supply-siders' argument be found if one looks further back in time? No. Charlie Gibson seems to think that capital gains tax revenue fell when the rate was raised as part of the 1986 Tax Reform Act that was signed by President Reagan. The reality is that capital gains realizations surged in anticipation of the rate increase (which took effect in 1987). In other words, an increase in the rate actually increased revenues, albeit temporarily. After that, with fewer gains to realize, realizations predictably declined, and eventually returned to their normal level -- until the Clinton adminstration, when the stock market went up so much that realizations boomed.

When Gibson pressed Senator Obama a second time, insisting that cutting the capital gains tax rate would raise revenue, Obama replied, "Well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going." Obama also brought up the issue of fairness in the tax code, and the fact that wealthy people with capital gains can pay less in taxes than middle-class Americans, which is an unacceptable feature of our system.

Senator Clinton, however, stated, "wouldn't raise [the capital gains tax rate] above the 20 percent if I raised it at all. I would not raise it above what it was during the Clinton administration." This is an unfortunate response. The rate was higher than 20 percent during most of the Clinton administration and the economy thrived and revenues poured in. And, since the revenue "baseline" used by Congress already assumes that the rate will revert to 20 percent when the Bush tax cuts expire at the end of 2010, no "new" revenue will be raised to pay for the candidates' health care proposals or other new initiatives by simply letting the rate revert to 20 percent.



Report: Taxes Are a Proven Strategy for Reducing Growing Income Inequality



| | Bookmark and Share

A state-by-state report issued jointly by the Center on Budget and Policy Priorities and the Economic Policy Institute finds that income inequality has been increasing, and that taxes are an important tool for closing the widening gap between rich and poor. The report finds that the rate at which income inequality has been increasing has accelerated in recent years, and that the very richest Americans (those in the top 5% of the income distribution) are especially pulling away from the rest of the pack.

Federal taxes, though, are playing an important role in offsetting this trend. Using data from by the US Census, the report finds that before federal taxes are levied, the top fifth of income earners possess 9.3 times more income than the bottom fifth. After federal tax payments are taken into account, however, that number falls to 7.3 times more than the bottom fifth. So while most Americans may dread April 15, it turns out that day has some positive influences for those concerned with the continued concentration of income in the hands of the fortunate few. Unfortunately, this equalizing influence has become less pronounced in recent years, largely as a result of the benefits the rich have received from the Bush tax cuts. Reductions in federal taxes for the rich are therefore at least partially to blame for accelerated income inequality.

Like the Bush tax cuts, the report finds that changes in state tax systems over the past two decades have contributed to the accelerated rate of income inequality. In times of plenty, states were eager to cut progressive income taxes, but whenever budgets began to get tight, states turned primarily to regressive sales taxes and fees to fill the gap. The report warns that with states now "on the brink of another fiscal crisis", this habit needs to be abandoned.

Increasing taxes, especially on the wealthy, can both slow the trend of increasing income inequality, and actually close budget gaps with less harm to state economies than what typically results from large spending cuts. The report advocates increasing income taxes, enacting or expanding low-income credits, and avoiding corporate and estate tax cuts as sensible tax policies for addressing growing inequalities. As noted in the report, and documented extensively by the Institute on Taxation and Economic Policy, state tax systems, unlike the federal tax system, are regressive and therefore actually widen the income gap. The increasing income inequality documented in this report provides yet another reason for state policymakers to take the regressivity of their tax systems very seriously.



New CTJ Report: House Budget Plan Deals with Tax Policy More Responsibly than the Senate Plan



| | Bookmark and Share

Citizens for Tax Justice has released a new report explaining that the budget resolution approved by the House of Representatives last week deals with tax policy in a more responsible way than the version approved by the Senate. The differences between the two resolutions must be ironed out by a House-Senate conference committee that will negotiate a final version to be approved by both chambers.

The resolution approved by the House offers more responsible tax provisions in a number of areas.

First, the House budget plan uses "reconciliation instructions" that would make it easier to pass a bill to provide relief from the Alternative Minimum Tax (AMT) without increasing the deficit. Any further increase in the national debt is likely to be borne, in the long-run, by the middle-class, so it would be unfair to take on debt to provide AMT relief, which mostly benefits families that are relatively wealthy. The Senate plan, unfortunately, does not use this approach because the Senate assumes that an AMT patch will be deficit-financed.

Second, the House plan does not emphasize cutting the estate tax the way the Senate plan does. CTJ's data shows that the estate tax now affects fewer than 1 percent of estates. The Senate decided, however, to cut the estate tax for these few, wealthy families and to finance this tax cut with surpluses that may never materialize.

Third, the House plan would not cut taxes on better-off Social Security recipients. Such a tax cut, which the Senate plan includes, would only benefit those seniors who are well-off.

The House-Senate conference committee that takes up the budget resolutions should reject the choices that the Senate has made with regard to taxes and choose the more responsible path set by the House of Representatives.

Yesterday, the House and Senate budget committees both approved their respective versions of the federal budget resolution for fiscal year 2009 on party-line votes. Just as happened last year, both versions assume that the Bush tax cuts will expire at the end of 2010 or that, if they are extended, they will be subject to pay-as-you-go (PAYGO) rules. This means that the costs of any tax cut extension would have to be offset with increased taxes elsewhere or cuts in spending, so as to avoid an increase in the federal budget deficit. The House signaled that is it more committed to PAYGO, however, by including procedural protections for legislation to offset the costs of providing another year of AMT relief.

While the budget document is not binding and merely spells out the tax and spending goals of Congress, it can provide for procedural rules that may make certain legislation affecting the nation's fiscal health easier or more difficult to pass. For example, the budget resolution could include what are called "reconciliation instructions" that would instruct the relevant committees to write legislation to meet some fiscal goal, and this legislation could be passed in the Senate with only a simple majority of votes rather than the usual 60 needed to overcome a filibuster.

Republicans demanded that the reconciliation process be used to extend the Bush tax cuts without offsetting the costs. While budget resolutions are not law and cannot, by themselves, raise taxes, Republican lawmakers have taken to claiming that the resolution includes the largest tax increase in history since it does assume an extension of the Bush tax cuts. They made this same claim last year.

Senate Ready to Cave on PAYGO and Alternative Minimum Tax; House Says 'Not So Fast'

While the Republicans want to use the reconciliation process to increase the budget deficit, the House Democrats want to use it to keep the deficit under control. Their budget plan includes reconciliation instructions to produce revenue-neutral legislation that would delay a scheduled reduction in payments by Medicare to doctors and revenue-neutral legislation that would provide another year of relief from the Alternative Minimum Tax (AMT).

Congress will surely provide another "patch" to the AMT this year, meaning a temporary extension of the increase in exemptions that keep most people from having to worry about the tax. The question is whether it will be paid for or deficit-financed, as was the patch enacted at the end of last year.

Last year the House did pass a bill that would have paid for an AMT patch mainly by closing tax loopholes that allow managers of buyout funds to pay taxes at lower rates and shelter their income in offshore tax avoidance schemes. In the Senate, that bill did get the votes of all the Democrats (except the Presidential candidates, who were campaigning) but could not overcome the filibuster by Republicans. If such a bill was offered this year under the reconciliation process to protect it from a filibuster, its chances of passage would be greatly increased.

Despite this, many Senate Democrats are insisting that they not pursue the matter. Senate Finance Committee chairman Max Baucus was quoted by Congressional Quarterly saying, "think to cut to the chase, this Congress is not going to pay for AMT. I think it's a waste of time to have AMT paid for."

Senate Budget Committee chairman Kent Conrad (D-ND) told BNA that "My strong preference would be to have it offset. That was clearly not the will of the body last year and in our soundings, it's clearly not the will of the body this year."

Senate Democrats Plan to Spend "Surplus"

The budget resolutions project surpluses in fiscal years 2012 and 2013. Whether these surpluses will actually materialize is highly debatable. The budget assumes no more expenditures on Iraq beyond the $70 billion requested by the President. Further, the budget "baseline" used by the Congressional Budget Office, which assumes that the Bush tax cuts will expire at the end of 2010 as laid out under current law, does project a surplus in 2012 and 2013, but only if the Social Security surplus is included in the calculation. The Social Security surplus was not meant to be spent on other programs. It's not remotely clear that Congress can produce a surplus that does not include Social Security.

Nevertheless, Democrats in the Senate are planning to offer an amendment much like the one adopted last year that would show that the body intends to spend that "surplus" on extending parts of the Bush tax cuts that they describe as geared towards the "middle-class." While these do include the 10 percent rate and the child credit, they also include a cut in the estate tax to benefit families with estates worth several million dollars.

President Threatens Vetoes Over Small Differences in Spending

The Senate version calls for $18 billion above what the President has requested in discretionary spending (spending that must be approved each year) while the House version calls for about $22 billion over the President's request. This difference is relatively minor since the entire amount of discretionary spending requested by the President for fiscal year 2009 is $992 billion, and discretionary spending only accounts for around a third of all government spending. Nonetheless, the White House has signaled that the President is ready to veto bills that spend more on these programs than he has proposed, as he did last year. This raises the possibility that Congress could simply rely on continuing resolutions to keep the government running until the next president takes office.



New CTJ Report: Bush's Proposal to Slash Human Services Reveals the True Cost of His Tax Cuts



| | Bookmark and Share

President Bush's proposed budget plan for fiscal years 2009 through 2013 envisions huge cuts in education, health, environmental and other programs. Most observers believe that such budget cuts are too draconian to ever be implemented. After all, Congress has rejected many of them before. However, as a new report from CTJ explains, they should be taken very seriously in one important sense: They are exactly the sort of public service reductions that would be necessary if the Bush tax cuts are extended.

The Bush administration concedes that the budget deficit will top $400 billion for fiscal year 2009, but claims the deficit will be reduced thereafter. The President continues to assert, as he did last year, that following his plans will lead to a balanced budget in fiscal year 2012. It is therefore informative to examine how public services would be different in 2012 if Congress followed his advice.

Under the Bush budget proposal, federal spending on veterans' benefits would be 9 percent lower in 2012, as a percentage of the economy, than in 2008. Education and social services would be a fifth lower, natural resources and environmental programs over a fourth lower, transportation a third lower and community development over 62 percent lower. Medicare spending in 2012 would be 9 percent lower than in 2008, as a percentage of the cost of maintaining current services.

Meanwhile, the President proposes to make permanent his tax cuts, which expire at the end of 2010. In 2012, according to the administration's own numbers, those tax cuts will cost $249 billion, which is just over the $229 billion he wants to cut from domestic programs in that year. So his promise to "balance" the budget in 2012 even while his tax cuts are extended clearly involves a trade of massive reductions in public services in return for tax cuts.

The reality is that the President's tax cuts are actually more expensive than this, and there are many more problems with his budget projections, as explained in the CTJ report.



New CTJ Paper: Wall Street Journal Again Ignores Facts in Its Crusade for High-Income Tax Cuts



| | Bookmark and Share

The Wall Street Journal's editorial board is at it again. Their latest riposte in their ongoing duel with mainstream economics is an attempt to cast a normal upswing in capital gains tax revenue, which always occurs in an economic cycle, as proof that cutting capital gains taxes actually increases revenues. As a new paper from CTJ explains, this revenue is well below the peak it reached during the Clinton era... when taxes were higher.

The Journal points to data from the Congressional Budget Office (CBO) that documents this most recent increase in capital gains tax revenue.

But the CBO points out that capital gains "plunged between 2000 and 2002" because of the economic downturn occurring at the time. The implication is that we would expect capital gains to increase from that low point as the economy recovered even without a new capital gains tax break. In fact, it would be very unusual had they not increased from that very low point, regardless of whether the tax laws had changed.

Revenues from capital gains taxes, adjusted for inflation, are well below their level at the end of the Clinton administration, and capital gains tax revenues are not projected to come close to their Clinton-era levels at any time in the next decade.

Measured as a percentage of the economy (GDP), capital gains tax revenues have actually declined even more dramatically.



CTJ Paper Finds President Bush Misleading about Tax Cuts During the State of the Union Address



| | Bookmark and Share

In his final State of the Union Address on Monday, President Bush warned ominously that families would see a tax increase of around $1,800 if his tax cuts are not extended before the end of 2010, when they expire. A new paper from CTJ explains that only 16 percent of taxpayers will get tax cuts that large in 2010, when all the Bush tax cuts are fully phased in. In fact, the majority of taxpayers will get less than a third of that amount in tax cuts. Further, it's highly misleading for the President to imply that the tax cuts for middle-income families might disappear when even the Democratic presidential candidates have proposed to extend them for anyone who is not among the richest 2 or 3 percent of taxpayers.



Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform



| | Bookmark and Share

Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For

House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.

Individual Income Taxes Would Be Simpler and More Progressive

Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.

Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.

In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.

Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.

Corporate Taxes Would Be Simpler and More Efficient

The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.

It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.

Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.

Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code

Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.



Pollsters Tell GOP Tax Breaks No Longer Priority for Independents



| | Bookmark and Share

A story from Roll Call reveals that Republican Senators have been advised by their pollsters that tax breaks are no longer a priority for independent voters. Most now rate health care reform and government spending as more pressing matters.

It's not actually clear that tax breaks ever were the most important priority for many Americans. It's often been the case that survey respondents would say they support tax breaks and oppose tax increases generally. But when asked whether they would prefer an improvement in health care, education or some other public service or a tax cut, most choose the improvement in public services. Support for public services has probably increased in recent years. A recent poll shows that two thirds of Americans support universal healthcare even if it means a tax increase. (Perhaps this is because many people realize that what they pay in taxes for healthcare may very well be less than what they pay now under our health care system, which is less efficient than that of almost every other developed country).

The Roll Call story does imply that there is polling to show that independent voters have some vague sense that government spending is too high, but we suspect that as with taxes, respondents would answer very differently when presented with choices about the actual government programs that cost the most money. About a fifth of federal spending goes toward healthcare, another fifth toward Social Security, and another fifth toward defense. That means most federal spending goes towards things most Americans support. Another nine percent goes toward paying the interest on the national debt, which the Bush administration has actively increased, largely with tax breaks.

Americans express very different views when they are confronted with the trade-offs involved when vague calls for "smaller government" are turned into specific legislative plans to cut services. For example, the previous Congress's efforts to slash Medicaid and other federal services didn't seem to win it many supporters. Conservative politicians have in the past been able to appeal to voters by offering stark choices between "small government" and "large government" or between "lower taxes" and "higher taxes" but they find it difficult to get Americans to agree on specific services to cut rather than expand.



Bush Administration Struggles to Present Deficit Numbers as Evidence that Tax Cuts Help the Economy



| | Bookmark and Share

The Administration has reduced its economic growth projections but is still arguing that its tax policy is stimulating the economy. President Bush is now touting projections that the federal budget deficit for fiscal year 2007 will be only $205 billion as proof. The projections came Wednesday in the Mid-Session Review from the Office of Management and Budget. The Center on Budget and Policy Priorities rightly points out that revenues have increased, reducing the deficit from its high of $413 billion in 2004, but that always happens in an economic recovery, and usually revenues increase by more (by around 12 percent, as opposed to the 3 percent increase that we've seen since the beginning of this economic cycle in 2001). What's more, revenue increased by 16 percent in a similar period in the economic cycle during the 1990s after taxes were increased. Finally, the Administration actually reduced its growth forecast for this year from what it projected back in February.

The only thing we would add is that the real deficit is bigger than $205 billion. The Mid-Session Review clearly indicates (on page 32) that the Administration will borrow $180 billion from the Social Security Trust Fund this year to keep the total deficit as low as $205. Social Security is projected to collect $180 billion more in payroll taxes than it will pay out in benefits this year. Social Security was changed back in the 1980s to collect a surplus that would make it easier to pay benefits later on, when the baby boomers retire in large numbers and more Social Security benefits must be paid out. The Social Security Trust Fund is essentially the accounting mechanism that keeps track of this, and it was never intended to be used to make budget deficits appear smaller than they really are. Not counting the Social Security surplus, this year's budget deficit is really $385 billion.



Should Wealthy Investors Have Lower Tax Rates than the Rest of Us?



| | Bookmark and Share

Warren Buffet attacked the federal tax preference for the rich over the middle-class Tuesday, arguing that it is an outrage that his receptionist pays a higher effective tax rate than he does. A major cause of the problem is the special low tax rate (15 percent) for capital gains and dividends, which mostly benefits the wealthy. Conservatives often argue that repealing this tax break or allowing it to expire (it currently is scheduled to expire at the end of 2010) would cause investment to dry up and lead to a loss of jobs. Unfortunately for proponents of the tax break, there has been no relationship between low capital gains tax rates and economic growth over the past 50 years. The lower rate can just as easily lead to greater inefficiency in the economy, since it can result in tax shelters that have no real economic rationale (as investments are made purely to transform ordinary income into capital gains).

Congress May Take a Small Step in the Right Direction

For those members of Congress who get a little weak-kneed at the thought of allowing the President's favorite tax cut to expire or be repealed, there are smaller steps that can be taken in this direction. For one thing, private equity fund managers making millions or even billions of dollars are taking advantage of the special capital gains rate even though they are not actually investing their own capital.

The House Ways and Means Committee is expected to hold hearings in July to consider a bill (H.R. 2834) that would close this loophole. Meanwhile, Senate Finance Committee chairman Max Baucus (D-MT) and ranking member Charles Grassley (R-IA) are sponsoring a narrower bill that would require publicly traded partnerships that get their income from investment services to pay the corporate income tax rate of 35 percent (which is what other publicly traded partnerships almost always must pay) instead of the capital gains rate they currently pay. The Finance Committee is expected to hold hearings later this summer and it is not yet clear if Baucus will add the provisions the House includes in its version relating to the taxing of the fund managers' compensation.

Citizens for Tax Justice director Robert McIntyre has recently appeared on television twice to debate this issue, once on May 7 and a second time on June 21.



Bush Tax Cuts Reduced President's Taxes by 14 Percent, Cheney's by 21 Percent, in 2006



| | Bookmark and Share

A new paper from Citizens for Tax Justice shows that President George W. Bush and his wife Laura received a $31,037 income tax reduction for 2006 due to the President's tax cut program. Vice-president Dick Cheney and his wife Lynne, whose income was much higher, saved $110,932.

CTJ director Bob McIntyre notes, "At a time when our nation is running huge deficits and spending hundreds of billions of dollars and thousands of American lives on the Iraq war, you'd think such people would be asked to sacrifice a little rather than receiving such largesse."



The Nonsensical "Tax Freedom Day"



| | Bookmark and Share

If it's April, it must be time for... Tax Freedom Day. According to the folks at the Tax Foundation, Tax Freedom Day is the day on which "the nation has finally earned enough to pay all the taxes that will be due for that year." The calculation is a pretty simple one: as the Foundation describes it, they're just "dividing the nation's total tax payments by the nation's income." In 2007, that figure is 32.7%. So, the report concludes, Tax Freedom Day is 32.7% of the way through the year in 2007, which would be April 30.

The Center on Budget and Policy Priorities explains why Tax Freedom Day is a meaningless concept. For one thing, the average percentage of income paid towards federal taxes, as reported by the Tax Foundation, is actually higher than the percentage that all but the highest income quintile really pay. The wealthiest have incomes so high that they pull up the average above what people in the middle pay. The statistic also fails to capture certain sorts of income. Also, if the percentage has gone up as the Tax Foundation claims, it's because of rising income at the very top (which leads to more taxes paid in higher income brackets), not because of higher taxes.

Unfortunately, every year a few media outlets gullibly (or knowingly) write this story in a way that makes readers think the statistic says something about the "typical" American's tax level. Some media outlets use the Tax Freedom Day as a rhetorical tool to assert that our taxes are too high. Others simply regurgitate the report's results without making the faintest effort to evaluate what it all means. And a few worthy reporters bring up the topic just to point out that the data doesn't mean anything.



Senate Democrats' Budget Plan Would Block Tax Cuts if Not Paid For



| | Bookmark and Share

The Senate Budget Committee approved a plan Thursday that would allegedly bring the budget into surplus by 2012. The resolution would also require any extension of the Bush tax cuts or reform of the Alternative Minimum Tax (AMT) to be paid for. The budget resolution is the blueprint for spending and revenues in fiscal year 2008 and also sets goals for a five-year period. The resolution revives a PAYGO requirement, meaning any new entitlement spending or new tax cuts must be offset with either increases in revenue or cuts in spending. The Bush tax cuts were specifically written to expire in 2010 so the baseline used by the Congressional Budget Office also assumes a 2010 expiration. By retaining this assumption and reviving PAYGO, the resolution would force Congress to either let the tax breaks expire in 2010 or come up with money to offset whatever parts of the tax breaks they want to extend.

The budget resolution would allow discretionary programs (programs for which Congress must approve funding each year) to receive $16 billion more than the President's proposed budget in fiscal year 2008. But the President's proposed discretionary funding level is actually a $10 billion cut below what would be needed to keep up with inflation, so the Senate Budget Committee is only suggesting a very modest increase in spending. The budget resolution would also allow for an expansion of the State Children's Health Insurance Program (SCHIP)... if Congress finds a way to pay for it.

Is Requiring a Balanced Budget the Same Thing as Hiking Taxes?

The proposal has been criticized by opponents like the ranking Republican on the Senate Budget Committee, Judd Gregg (R-NH) (who did not oversee any budget improvement during his time as the Budget Chairman). Gregg claims that the proposed resolution is dodging important decisions by not specifying where the extra revenues for SCHIP expansion and other initiatives will come from, but budget resolutions under the Congressional process established in 1974 are not supposed to instruct the appropriations committees or the tax-writing committees exactly what to do. Rather, the resolution is to only provide the overall spending and revenue goals for the committees. Gregg and others are also saying that any requirement that tax cuts be paid for is a tax increase that must be opposed. This logic seems to favor increasing the national debt, and the interest payments on it, indefinitely or making massive (and politically unlikely) cuts in services Americans currently depend on.

In Search of a Free AMT Fix The critics also have attacked the proposal's assumption that revenue will be needed to "fix" the AMT only for two years, when no one really thinks Congress will allow the AMT to revert to current law and start reaching tens of millions of taxpayers. But this is actually consistent with the desire to stick to PAYGO. Any change from current law (and the AMT will reach tens of millions more people under current law) that loses revenue must be offset to avoid increasing deficits. Perhaps the first step in countering these criticisms would be for Congress to fix the AMT in a budget-neutral manner as proposed by Citizens for Tax Justice. The House Democrats will present their budget propsal next week.



CTJ Tells Appropriation Subcommittee Bush's Tax Proposal Will Cost Over $5 Trillion in Second Decade



| | Bookmark and Share

In testimony Monday before the House Appropriations Subcommittee on Financial Services and General Government, Citizens for Tax Justice Executive Director Bob McIntyre presented the latest CTJ data on the Bush tax cuts. He explained that the administration's proposal to make the tax cuts permanent will cost a total of $5 trillion dollars from 2011 through 2020. This total includes the added interest on the national debt accumulated as a result of the tax breaks. While the President's proposed budget does not include permanent AMT reform, this calculation assumes that Congress will be forced to change the AMT (either through consecutive "patches" or through legislation that permanently reforms the AMT).



Latest Data From CTJ Shows Over Two Trillion Spent this Decade on Tax Cuts



| | Bookmark and Share

Majority Goes to Richest One Percent

Citizens for Tax Justice has released the latest data showing the cost and distribution of the Bush tax cuts enacted through 2006. The projected total cost of the tax cuts from 2001 through 2010 is either $2.4 trillion or $2.6 trillion, depending on whether or not Congress chooses to extend temporary higher exemptions from the Alternative Minimum Tax (AMT). The top one percent of taxpayers would receive 53 percent of the benefits of the tax breaks in 2010 under the President's budget proposal (which does not include extending AMT exemptions). Extending AMT relief through the end of the decade would cost an additional $278 billion.

 

Archives

Categories