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.

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. 

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.

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.

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.

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.

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.

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.

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

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.

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.  

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

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