New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.
The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.
Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.
For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.
To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”
And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”
Read the CTJ reports:
The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue
The President’s FY 2015 Budget: Tax Provisions Affecting Businesses
Obama's Tax Policies News
New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
A lot of gimmicky bills are proposed each Congressional session, but few are quite as ridiculous as the proposal by a bipartisan group of lawmakers in the House and Senate to create a new federal income tax break for the cash bonuses received by U.S. Olympic medalists. Not willing to be outdone by Congress, the Obama Administration has even voiced support for the legislation, saying that they want "to ensure that we’re doing everything we can to honor and support our Olympic athletes."
Unfortunately, this isn't the first time lawmakers have proposed a special carve-out for Olympic medalists. In fact, this latest push is just a rehashing of identical bills pushed during the 2012 Olympics, which led us back then to have a real facepalm moment.
First, the income tax system should be neutral in terms of how individuals earn their income and there is no moral or economic case for exempting the earnings of Olympic athletes over other categories of workers. Is the work being done by Olympic athletes really more noble than say the work being done by firefighters, EMTs or soldiers?
Second, aren’t lawmakers always claiming they want to make the tax code simpler? Isn’t it obviously more complicated to fill the tax code with provisions treating different groups of people differently?
And this proposal would, in fact, add provisions to the tax code to benefit a very small subset of people, around 100 or so US citizens who receive an Olympic medal every two years.
The way the proposal is being promoted is also wildly dishonest. The proponents of the bill have based their campaign on the eye-catching, yet false, claim that Olympic athletes could end up owing as much as $10,000 in taxes on the bonus from their gold medal. The reality is that this $10,000 figure is completely bunk because most Olympic athletes are not wealthy enough to pay the full 39.6 percent rate on the gold medal that the figure assumes. In addition, Olympic athletes could potentially wipe out the entirety of the tax by deducting the expense of their training and travel for the event.
As if all of this was not bad enough, it seems that the legislative language is so broadly written that it could actually allow exemptions for huge cash bonuses given to Olympic competitors through endorsement deals. For example, if the legislation passed, the well-known Olympic swimmer Michael Phelps could structure his future endorsement deals such that he receives $300,000 tax-free for each medal earned.
Hopefully, lawmakers will resist the clarion call of publicity surrounding these and other gimmicky tax proposals and push real tax reform options going forward.
Photo of Olympics via U.S. Army IMCOM Creative Commons Attribution License 2.0
In his State of the Union address, President Obama touched on tax issues a few times, most prominently in connection to business tax reform.
“Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let’s flip that equation. Let’s work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.”
Which companies does President Obama think should get these tax breaks for creating jobs here in the U.S.? In 2012, President Obama told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” At that time CTJ pointed out that over the past ten years, Boeing had paid nothing in net federal income taxes, despite $32 billion in pretax U.S. profits.
Here’s the uncomfortable truth: A lot of the corporations doing business in the U.S. already are paying little or nothing in taxes, as demonstrated by CTJ’s 2011 study of consistently profitable Fortune 500 corporations – a study that examined the U.S. taxes paid on the corporations’ U.S. profits. Even for those companies that do pay a reasonable effective tax rate in the U.S., there is no real economic evidence that lowering their tax rate will lead to economic growth for America.
In fact, the U.S. corporate tax is far lighter than the corporate taxes imposed by other countries. According to the Department of the Treasury and the Congressional Budget Office, federal corporate tax revenue in the U.S. was equal to 1.2 percent of our economy in 2011 (1.5 percent if you include state corporate taxes). The average for other OECD countries (which include most of the developed countries) in 2011 was 2.9 percent.
While the President did say that savings from closing tax loopholes could be used to lower tax rates, he immediately followed that by saying:
“Moreover, we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes – because in today’s global economy, first-class jobs gravitate to first-class infrastructure.”
But notice the fine print – he says this is revenue that would be raised in the “transition to tax reform,” rather than a permanent, sustainable increase in tax revenue. As we have explained before, some revenue that would be raised if business tax loopholes were closed would be permanent, sustainable revenue – but the President wants to use that revenue to offset reductions in the corporate tax rate. But closing these tax loopholes would also produce some revenue that is temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary, like a boost in infrastructure investments.
But the main goal of tax reform should be to raise revenue on a permanent basis from both the personal income tax and the corporate income tax. When budget cuts have literally led to children being kicked out of Head Start and reductions in investments like medical research, the need for revenue is obvious. The need to lower Boeing's effective tax rate further below zero is not.
A recent court ruling allowing the use of the “manufacturing” tax deduction by a company that places candy bars and bottled wine in gift baskets illustrates a truth that politicians hate to admit: The tax code is a lousy tool for encouraging domestic manufacturing.
In a recent column, gadfly journalist David Cay Johnston berated the federal district judge in the case for his interpretation of section 199 of the tax code, which allows a company to deduct 9 percent of its income that is generated from domestic manufacturing. This law was passed by Congress after the World Trade Organization (WTO) found in 2002 that a U.S. tax break meant to encourage exports violated trade treaties and the European Union began to impose sanctions against the U.S. in 2004. Congress decided to replace the illegal tax break with a new one, which became section 199.
By the time it was enacted, this provision had been hijacked by lawmakers who stretched the term “manufacturing” to include things like drilling for oil, constructing buildings, and the architectural services to design those buildings. A footnote in the conference report in the legislation made clear that a company like Starbucks could claim the deduction for roasting coffee beans used in its beverages.
In fact, the definition of manufacturing seems so unclear that we should not be surprised by the recent court ruling regarding gift baskets. Johnston notes that Greg Mankiw, who was President Bush’s chairman of the Council of Economic Advisers, questioned the whole concept in 2004 when he wrote, “When a fast-food restaurant sells a hamburger, for example, is it providing a ‘service’ or is it combining inputs to ‘manufacture’ a product?”
More Tax Breaks for Companies that Already Avoid Taxes?
President Obama has proposed to increase such tax incentives. His “framework” for corporate tax reform, the vague plan for lowering the corporate tax rate to 28 percent that he made public in February of 2012 and proposed again recently with slight changes, would expand the section 199 deduction.
In theory, the President’s proposal could improve things because it would “focus the deduction more on manufacturing activity,” which is a nice way of saying that oil companies and people who assemble gift baskets are on their own.
But the bigger question is whether American manufacturers actually need tax breaks. In 2012, just before Obama announced his “framework,” he told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” CTJ immediately released figures showing that Boeing’s effective tax rate over the previous decade was negative. In fact, there had only been two years during that decade when Boeing paid anything in federal income taxes.
Fix the Real Problems
A lot of people in the Obama Administration and in Congress (and, of course, K Street lobbyists) have the idea that our corporate tax is too burdensome on companies and that this pushes them to manufacture products offshore. However, CTJ’s major 2011 study of most of the profitable Fortune 500 corporations found that two-thirds of those with significant offshore profits actually paid higher taxes in the other countries where they did business than they paid in the U.S.
The real problem with our international corporate tax rules is the provision allowing American companies to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. And to a large extent, deferral results in American companies disguising their U.S. profits as tax haven profits rather than moving actual operations. And that problem cannot be solved by any amount of tax breaks thrown at companies that claim to “manufacture” something in the U.S.
If lawmakers and the media are confused about the President’s recent proposal to enact a business tax reform tied to a jobs program, it’s because the White House has not explained it very well. The President’s plan has been depicted by some as a major shift away from his long-held position that tax reform affecting corporations (and possibly other types of businesses) should be revenue-neutral.
That’s all wrong. What the President just proposed is not much different from his previous proposals. If the President really had shifted away from his previous position and declared that corporations should contribute more to fund public investments on a permanent basis, we’d be a lot happier about it. But that’s not what the President has said. If anything, his “new” proposal is more of a clarification than a shift in policy.
(See our previous blog post describing the President’s proposal.)
President Obama has consistently said that business tax reform should be “revenue-neutral,” meaning loopholes and special breaks would be eliminated but the revenue savings would all be used to offset a reduction in tax rates paid by corporations, so that, overall, corporations would not pay more than they do today. The fact sheet released by the White House yesterday still describes his approach to reform as “revenue-neutral.”
All that’s changed is that the President acknowledged that some of the revenue raised from eliminating loopholes and special breaks might be temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary. The President proposes to use this temporary revenue to fund a temporary jobs program.
Not counting this temporary revenue increase (which might only appear in the first decade or so after a tax overhaul is enacted) the President’s approach would be revenue-neutral. So the President’s approach still falls short of the “revenue-positive” corporate tax reform that CTJ and others organizations have called for.
The President did not elaborate on possible temporary revenue increases, but here’s an example of how it might work. We have argued that businesses, particularly those set up as corporations, often benefit entirely too much from accelerated depreciation and that this does not help our economy. Accelerated depreciation consists of businesses taking deductions for investments in equipment much more quickly than the equipment actually wears out. If Congress repeals or limits accelerated depreciation, that means businesses will have to take these deductions over a longer period of time. They’ll pay more early on, but less in later years because these deductions are spread out over a longer period of time.
This means that some of the revenue raised by repealing or limiting accelerated depreciation simply represents a timing shift. Taxes are paid during this decade that would otherwise be paid in the next decade. On the other hand, some of the revenue increase we see in the first decade would be permanent, occurring again in the next decade and the decade after.
If lawmakers want to offset a permanent reduction in tax rates, only the permanent part of this revenue increase can be used for that. Otherwise the reform will be “revenue-negative,” meaning it loses revenue, in the second decade or third decade after it’s enacted.
There are other types of changes that can lead to timing shifts, resulting in a larger revenue increase in the first decade than in the second or third decade after reform is enacted. For example, if Congress enacts some sort of tax on profits that corporations have accumulated offshore, then part of the resulting revenue gain would be temporary because some of those profits would have been repatriated and taxed at a later date under the current rules. (Keep in mind that here we’re talking about a mandatory tax of some sort on offshore profits, not the sort that would be paid under a “repatriation holiday” for corporations to choose to bring profits back to the U.S. — that sort of proposal loses revenue.)
None of this was explained in the President’s speech on this topic or in the fact sheet released by the White House, but rather was mentioned when Gene Sperling, director of the National Economic Council, explained to reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”
So the only new development is that the White House has acknowledged that some of the revenue increase that comes from closing corporate tax loopholes would be temporary and therefore should be used to fund something temporary rather than permanent rate cuts. CTJ’s longstanding view has been that corporations should contribute more on a permanent basis to support the public investments that make this nation prosperous — and that make their profits possible. That’s why we see the President’s proposal as only a slight improvement over his previous one.
President Obama Clings to His Proposed Business Tax "Reform" that Would Raise No Revenue in the Long-Run
Obama’s Plan Wisely Makes Job Creation the Priority, But Unwisely Lets Corporations Off the Hook
President Obama has once again proposed to reform business taxes without raising any revenue in the long-term. He has shifted his position slightly, however, by proposing to raise some revenue in the very short-term from businesses in order to fund infrastructure and other investments that would create jobs.
While the President’s focus on job creation is laudable, the fact that he still refuses to call for permanently increasing the amount of revenue generated from the corporate tax is a big disappointment. Over the last three years, CTJ has written reports and op-eds explaining why reform of the corporate income tax (as well as reform of the personal income tax) should raise revenue. CTJ also published reports explaining that profitable corporations pay an effective tax rate that is far lower than the statutory tax rate of 35 percent (which corporate lobbyists want to lower), and many pay no taxes at all.
A letter to members of Congress that was circulated by CTJ in 2011 and signed by organizations in every state explains that, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”
A similar letter was signed by even more organizations at the end of 2012 before being sent to members of Congress.
President Obama’s Same Old Framework, with One Addition
While speaking today at an Amazon facility in Chattanooga Tennessee, President Obama proposed that Congress enact a business tax reform that closes loopholes, “ends incentives to ship jobs overseas, and lowers rates for businesses that create jobs right here in America,” and also simplifies tax filing for businesses. He also proposed to “use some of the money we save by transitioning to a better tax system to create more good construction jobs” and other types of jobs.
A fact sheet released by the White House explains that the tax reform would be “revenue-neutral” in the long-run, because revenue saved from closing loopholes would go towards offsetting the cost of lowering the corporate tax rate from 35 percent to 28 percent (and setting the rate even lower, at 25 percent, for domestic manufacturing).
This is entirely in keeping with the “framework” for business tax reform that the President proposed in February of 2012. CTJ criticized the framework for not calling for increased revenue and for failing to explain which loopholes would be closed to offset the costs of the rate reductions.
The one thing that is new, based on the President's speech in Chattanooga, is his proposal to use a temporary increase in revenue generated from "transitioning to a better tax system" for public investments that create jobs. This new wrinkle is the President's recognition that some of the tax reforms under consideration will raise money in the short run, but will raise far less after they are fully phased in. The President says this short-term revenue should not be counted in calculating whether tax reform is “revenue-neutral,” but should instead be devoted to his “jobs program.”
Such short-term extra revenues could come from changes that alter the timing of tax payments, like limiting accelerated depreciation so that business must wait longer before they can write off the cost of equipment, or from a transition rule for taxing current offshore corporate profit hoards (at an unspecified tax rate). In speaking about this type of timing shift, Gene Sperling, director of the National Economic Council, told reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”
Overall, however, the President continues to ignore what should be an essential result of real tax reform: to make corporations pay their fair share of taxes in order to provide the additional revenues we need to provide the public services and investments that our country needs.
Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals
A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.
Read the report.
Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.
CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.
CTJ’s report concludes that:
1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.
2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.
3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.
4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.
President Obama has proposed to limit the tax savings for high-income taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the upcoming decade.
A new report from Citizens for Tax Justice (CTJ) analyzes the proposal and models its effects on taxpayers nationally and state-by-state. Findings include:
- Only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal less than one percent of their income, or $5,950.
- The deduction for state and local taxes and the deduction for charitable giving together would make up just over half of the tax expenditures (deductions, etc.) limited under the proposal.
- Arkansas and West Virginia have the lowest percentage (1.6 percent) of taxpayers who would see a tax increase from this proposal; Washington, D.C. would have the largest percentage (8.9 percent) followed by Connecticut and New Jersey (both 6.7 percent).
Let’s start with the facts. Every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200. Here’s another metric. Every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.
Can you say “return on investment?”
Here’s another fact. The IRS’s budget has been reduced by 17 percent since 2002 (per capita and adjusted for inflation), and that includes this year’s sequester cuts. To adapt to the $594.5 million in budget cuts required by the sequester, the IRS has announced it will be forced to furlough each of its more than 89,000 employees for at least five days this year. While deficit reduction is supposed to be the goal of the sequester, cuts to the IRS will probably increase the deficit because it’s the IRS, after all, that collects tax revenue. In fact, one expert estimated recently that furloughing 1,800 IRS “policeman” positions could cost the Treasury – that is, all of us – some $4.5 billion in lost revenue.
Denied adequate resources over the years, the IRS has not been able to keep up with its current workload, let alone expand its work. For example, a new report on IRS enforcement found that the agency actually audited 4.7 percent fewer returns in 2012 than it did in 2011. Considering that the IRS typically recovers about 14 percent of the $450 billion of unpaid taxes in a single year with its current resources, by increasing IRS resources we stand to reap billions in additional revenue from noncompliant taxpayers.
The Obama Administration proposed in its fiscal year 2014 budget to increase the IRS’s budget to $12.9 billion, about $1 billion more than its 2012 budget, with about $5.7 billion of that going to enforcement. This increase doesn’t go nearly far enough considering the substantial decline in its budget during the past decade, but it’s a small investment we’d be smart to make.
Information is starting to trickle out of the White House about the budget proposals that the President is to release on Wednesday of next week. The proposal will be controversial because it includes cuts in Social Security and Medicare spending. Here's what we know so far about the tax proposals in the plan.
1. It appears that President Obama will propose less in new revenue than the $975 billion called for in the budget resolution approved by the Democratic majority in the Senate. This seems very ill-advised, as we have already noted that the Senate resolution would not even raise enough revenue to pay for the level of spending that Ronald Reagan presided over. As the Washington Post explains,
The budget is more conservative than Obama’s earlier proposals, which called for $1.6 trillion in new taxes and fewer cuts to health and domestic spending programs. Obama is seeking to raise $580 billion in tax revenue by limiting deductions for the wealthy and closing loopholes for certain industries like oil and gas.
This revenue would be used to reduce the deficit.
The President's proposal will have some additional revenue-raising proposals, "increased tobacco taxes and more limited retirement accounts for the wealthy that are meant to pay for new spending." It is unclear how much those additional proposals would raise, but it appears that the total new revenue would be below what the Senate budget resolution calls for.
2. The vast majority of the President's proposed new revenue would come from his proposal to limit the tax savings of each dollar of certain deductions and exclusions claimed by wealthy taxpayers to 28 cents. A recent CTJ report breaks down the composition of the tax expenditures limited by this proposal and how some taxpayers would be affected.
3. One of the new revenue-raising proposals from the President that would pay for new spending is a limit on individual retirement accounts (IRAs) for the wealthy that CTJ proposed in its recent working paper on revenue proposals. We noted that IRAs provide a tax subsidy to encourage retirement saving, which Congress surely never intended to allow Mitt Romney to save $87 million tax-free.
The Washington Post reports Obama’s plan would
… also seek to generate revenue by limiting how much wealthy individuals can accrue in their tax-retirement accounts. Such accounts would be capped at $3 million in 2013 dollars — which officials say is enough to finance a $205,000 a year income.
We’ll have more analysis as we learn more.
The largest revenue-raising proposal put forth by President Obama, which is expected to be among the proposals the White House plans to release next week, would limit the tax savings of each dollar of certain deductions and exclusions to 28 cents. CTJ's new report on the President's proposal examines who would be affected and also breaks down the composition of the tax expenditures limited under the proposal.
For example, the report finds that Obama's proposal, which would only apply to married couples with AGI above $250,000 and singles with AGI above $200,000, would affect just 2.4 percent of taxpayers in 2014. The deduction for state and local taxes would make up over a third of the tax expenditures limited, and the deduction for state and local taxes along with the charitable deduction would, together, make up over half of the tax expenditures limited under the proposal.
Read the report.
During his State of the Union Address, President Barack Obama reiterated the principle that the United States must prioritize getting rid of tax loopholes for the wealthiest individuals and most profitable corporations in order to ensure that everyone is paying their “fair share” to reduce the deficit. While in principle it’s hard to argue with this approach, the tax policy agenda the President laid out during his speech does not go nearly as far as it should both in terms of deficit reduction and correcting the inequities in our tax code.
Buffett Rule Not Enough to Ensure Fairness
For example, during the speech President Obama called for a tax code that would ensure that “billionaires with high-powered accountants” do not pay a lower tax rate that their “hard-working secretaries.” His proposal to accompany this principle has been the so-called “Buffett Rule,” which would require everyone making over a million dollars to pay a minimum effective tax rate over at least 30 percent.
But this would still leave in place the preferential rate on capital gains and dividends that is the primary reason that wealthy investors like Warren Buffett have such low effective tax rates. A better approach would be to end the special treatment of capital gains and dividends, which would both raise more revenue and deal with the core issue of fairness.
Truly Ending Offshore Corporate Tax Dodging Requires More
Turning to corporate taxes, President Obama said that we need a tax code that “lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.”
To start, rather than calling for a measure that simply “lowers incentives,” Obama should address the problem at its root, by repealing the rule allowing corporations to defer – indefinitely – taxes on their offshore profits. (Those profits, of course, are often artificially shifted offshore with the goal of avoiding taxes.) This exact reform was recently introduced in both the House and Senate in the “Corporate Tax Dodging Prevention Act.”
Corporate Tax Reform Must Raise Revenue
In addition, while it’s great that President Obama is proposing to get rid of a myriad of corporate tax breaks, it is not entirely clear that he intends to wisely use the revenues it would generate. His 2012 corporate tax framework, for example, calls for the revenue generated by closing loopholes to be spent on lowering the overall corporate tax rate and even expanding some of the breaks for manufacturers (which really don’t warrant the special treatment); this proposal to keep corporate tax reform revenue-neutral meant that corporations would continue to pay a low effective corporate tax rate overall and have no positive impact on the budget.
In his State of the Union Speech, however, he implied that corporate tax reform should also result in revenues to help bring down the deficit, and this more recent rhetoric about using the revenues for deficit reduction is certainly promising. What should come next is a clear rejection of revenue-neutral corporate tax reform and an explicit commitment to boosting corporate tax revenues in order to fund investments that benefit all Americans, including the consumers that keep corporations profitable.
Balanced Approach? Spending Cuts for Deficit-Reduction Have Already Been Enacted
Addressing the sequestration cuts scheduled to kick in March 1, President Obama used the State of the Union address to reiterate his commitment to include a mix of revenues and spending cuts as part of a “balanced approach” to deficit reduction, saying we should not “make deeper cuts to education and Medicare just to protect special interest tax breaks." Citizens for Tax Justice has noted (as did the President in his speech) that the last several rounds of deficit reduction have already relied primarily on spending cuts. Logically, then, to achieve true “balance” in reducing the deficit, the sequester should be replaced almost entirely by revenue increases. That makes the President’s offer of more cuts unwarranted.
If enacted as is, the tax ideas President Obama outlined in his State of the Union address would be important steps towards reducing the deficit and improving the fairness of our tax system. If enacted following legislative compromise, they would likely be much smaller steps. But in any event, the President’s articulated goals would still leave gaping inequities in our tax code, and not do enough to ensure that we have the resources to make critical investments in our long term economic health.
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.
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.
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.
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
Perhaps the most striking thing about tax policy in 2012 is that it featured a presidential campaign focused on taxes and then ended with major legislation that resolved none of the issues raised in that campaign.
Even after the fiscal cliff deal (the American Taxpayer Relief Act of 2012) takes effect, Warren Buffett and Mitt Romney will still pay a lower effective federal tax rate than many relatively middle-income working people. Their effective tax rate may be five percentage points higher (since the capital gains and stock dividends that wealthy investors live on will be taxed at a top rate of 20 percent rather than 15 percent) but this does not eliminate the unfairness that Warren Buffett highlighted.
Meanwhile, the tax loopholes that allow profitable corporations like General Electric (GE) to avoid taxes were actually extended as part of the fiscal cliff deal. The law includes a package of provisions often called the “extenders” because they extend several special interest breaks for one or two years each. The extenders officially only add $76 billion to the costs of the law, but a recent CTJ report explains how their cost is likely to be far greater because Congress has shown a desire to extend these provisions again each time they expire.
One of the “extenders” is the one-year extension of “bonus depreciation,” which allows companies to write off the costs of equipment purchases far more quickly than those assets actually wear out. When these purchases are debt-financed, the result is that these investments have a negative effective tax rate, meaning the investments are actually more profitable after-tax than before tax. While corporations don’t usually reveal exactly which loopholes facilitate their tax avoidance, this one is certainly among those used effectively by GE and the other corporate tax dodgers identified in CTJ’s reports.
However, another tax break extended in the fiscal cliff deal actually has been identified by GE, in its public filings with the SEC, as having a significant effect in lowering its effective tax rate. This is the so-called “active financing exception,” which was extended through 2013 (and retroactively to 2012, since it had expired at the end of 2011). A CTJ report from 2012 explains that this break essentially makes it easier for U.S. corporations with income from financial activities to shift their profits to offshore tax havens.
The New York Times article from March 2011 that famously exposed GE’s tax avoidance explained that the head of GE’s 1,000-person tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — an extension of the active financing exception.
One thing is clear: Despite what Senator McConnell says, the tax debate is not over. There is a need for real tax reform, which means eliminating loopholes and ending the practice of extending “temporary” loopholes every couple years.
Why the "Extenders" in the Fiscal Cliff Deal Will End Up Costing More than Was Saved by Ending Tax Cuts for the Rich
The recently approved fiscal cliff deal (the American Taxpayer Relief Act of 2012) includes a package of provisions often called the “extenders” because they extend several special interest tax breaks for one or two years each. CTJ’s recent report on the revenue impacts of the fiscal cliff deal highlights a strange thing about the revenue “score” of these provisions from the Joint Committee on Taxation (JCT), the official revenue estimators for Congress.
JCT’s figures show that while the ten-year cost of the extenders is $76 billion, the cost in the first two years would actually be over $100 billion — which is greater than the revenue “saved” in the first two years of the decade by allowing the high-income Bush tax cuts to expire.
This is largely explained by one of the most significant of the extenders: the provision extending “bonus depreciation,” which allows companies buying equipment to take depreciation deductions more quickly than the equipment actually wears out.
The provision will allow companies to take depreciation deductions much earlier than they otherwise would, which will cost the Treasury more than $50 billion over the first two years of the decade, according to JCT. But because those deductions will then be unavailable in later years when they would have otherwise have been claimed, the Treasury will actually collect more revenue during the rest of the decade, so that, according to JCT, the extension of bonus depreciation will have a net cost of just $4.7 billion by the end of the decade.
Of course, in the event that Congress perpetually extends this provision, it will continue to have a large cost each year — and the legislative history makes this result seem likely. Bonus depreciation was enacted in 2002 and has only been allowed to expire for two years (2006 and 2007) since then. In every other year since 2002, Congress made this “temporary” break available. This legislative history is explained in a report from the Congressional Research Service which reviews efforts to quantify the impact of the provision and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”
Other breaks extended as part of the “extenders” package, like the research credit and the so-called “active financing exception” are officially “temporary” measures but have been extended over and over again for the last several years. Clearly, Congress’s practice of extending these breaks every couple years must end.
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:
Also see CTJ’s New Year’s Day report:
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.
Leading up to the election, prominent Democrats like Rep. Chris Van Hollen, ranking member of the House Budget Committee, were pushing to renew the payroll tax holiday in 2013, an idea that seemed all but dead in Congress just weeks earlier. The renewed push for extending the payroll tax holiday came amidst reports that the Obama Administration is considering replacing it with a new version of the Making Work Pay Credit.
The shift in debate toward renewing or replacing the payroll tax holiday is driven by concerns over ending such economically stimulative measures while the economy is still relatively weak. Compounding these concerns, a recent analysis by JPMorgan concluded that the payroll tax holiday’s expiration would reduce consumer spending by $100 billion and would cut the nation’s overall gross domestic product (GDP) by as much as 0.6 percent.
Most economists agree that a policy putting money in the hands of low- and middle-income people is likely to have a greater stimulative impact for each dollar spent than a policy putting money in the hands of high-income people.
From this perspective, the Obama Administration would be right to favor the Making Work Pay Credit; it is much more progressive than the payroll tax holiday, considering that only 27 percent of the holiday’s benefits goes to the bottom 60 percent, compared to 50 percent of the making work pay credit’s benefits. In addition, replacing the payroll tax holiday would also allay concerns from powerful voices, like AARP, that continuing the holiday will endanger the Social Security Trust Fund over the long term by weakening its dedicated funding source.
It still may be difficult to weigh the benefits of short-term stimulus provided by these tax cuts against their long-term impact on the debt. But it’s important to keep in mind that extending the entirety of the Bush tax cuts would cost $322 billion, which is more than two and half times the projected cost of the payroll tax holiday ($121 billion) and more than five and a half times the projected cost of the Making Work Pay Credit.
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.
If yesterday’s election was a referendum on taxes, what voters rejected was the tired oldargument that cutting taxes is good for an ailing economy, and that is a welcome development. For his part, President Obama has said winning would give him a mandate to raise revenue by ending the Bush tax cuts for the wealthiest Americans, one of his campaign promises. Republicans have said if he follows through on that promise, it will destroy any chance of the two parties working together in the coming years.
As we head into the lame duck Congressional session that begins next week and look ahead to 2013, let’s review the (frankly) uninspiring policy options both parties are proposing – proposing for a country where tax rates are at historic lows, income inequality is at historic highs, tax avoidance by the wealthy and corporations is epidemic and revenues are anemic.
Sadly, President Obama’s “balanced” fiscal plan comes up short. Far from raising needed revenues or “raising taxes on the rich” as many describe it, the President’s plan actually cuts taxes dramatically for most Americans. If President Obama's plan to keep all but the high end Bush tax cuts in place is implemented, the lion's share of the unaffordable and unfair tax cuts pushed through by President George W. Bush more than a decade ago would remain in place for another year, through the end of 2013 – at a one-year cost of $250 billion or more.
Whether the President succeeds in getting a grand bargain that includes a one year extension of most of the Bush tax cuts, or we end up with the Republicans’ latest idea for a six month “bridge” across the fiscal cliff, what both parties are saying is that the time they buy with these bargains will be used to rewrite the tax code in a permanent way. And while we agree that some kind of tax code overhaul is necessary, any overhaul that fails to raise revenue and increase tax fairness is not worthy of the word “reform.”
Our corporate tax system is currently in a shambles, with hugely profitable multinational corporations aggressively using shady tax dodges as well as tax breaks enacted by Congress to zero out their tax bills. Unfortunately, most Democrats and Republicans are listening to corporate lobbyists’ complaints that the U.S. statutory corporate income tax rate of 35 percent is too high. This complaint is largely baseless. We studied most of the Fortune 500 corporations that were consistently profitable in recent years and found that they collectively paid just 18.5 percent of their profits in taxes, and many paid nothing at all. Still, most plans for corporate tax reform from both sides of the aisle call for closing loopholes only to lower the rate, resulting in no new revenues for the Treasury.
We acknowledge, however, that Democrats have articulated some encouraging goals. In Congress, for example, Senator Carl Levin is actively working to close loopholes that allow corporations to shift profits to offshore tax havens. And President Obama has indicated he wants to restrict the most egregious corporate loophole, the rule allowing corporations to “defer” paying taxes on their foreign profits (which are often U.S. profits artificially shifted offshore). Contrasted with the Republican Party’s support of a territorial tax system that permanently widens that loophole and exempts all foreign profits, the President’s corporate tax framework looks progressive, even if it is woefully short on detail.
Our view, though, is that ending “deferral” entirely is the only road to real reform of the corporate tax. In this global economy, deferral is the massive hole in which our most profitable companies can legally hide their profits, even as those profits are at historic highs.
And the personal income tax, with or without the Bush tax cuts in place, contains expensive and unwarranted loopholes that make it possible for wealthy investors to pay taxes at a lower rate than middle-income workers – as Warren Buffett has so helpfully illustrated. There is a simple way to fix this, of course, and that is to tax capital gains and dividends the same way we tax income from salaries and wages. Other provisions of the personal income tax (like tax breaks for charitable deductions on appreciated property and the “carried interest” loophole) can be reformed or eliminated so that they no longer provide tax shelters for the richest Americans. But it’s the low rates on capital gains (and dividends) that overwhelmingly benefit the very wealthiest Americans, and tax reform that maintains a progressive federal income tax must end that special break.
Tax policy is often inscrutable, and one aspect that can complicate and thwart a constructive public discussion is the issue of which “baseline” or assumptions an analysis begins with. For example, there are those who characterize the scheduled expiration of the Bush tax cuts as a tax increase. Don’t believe them. Nor should you believe those who say that President Obama’s proposal to extend most of the Bush tax cuts would “raise revenue.” By law, the Bush tax cuts are still temporary and are set to expire at the end of this year. Allowing them all to expire is not a tax increase, and the President’s approach to extending most of them would result in less revenue (and a much higher budget deficit) than we’d get if Congress just did nothing, let the Bush cuts (and scores of smaller temporary tax expenditures) expire and went home.
Indeed, Congress simply going home next month and allowing the Bush tax cuts to expire on January 1, 2013 would not be the worst result. You hear people say that we can’t possibly allow all the Bush tax cuts to expire because they benefit low- and middle-income Americans who need help, especially right now. But this is no reason to enact a bill that also extends tax cuts for the rich, which are far larger, and that’s exactly what it would mean to extend the Bush tax cuts wholesale. We’ve estimated that if Congressional Republicans get their way and all the Bush tax cuts are extended, 32 percent of the benefits would go to the richest one percent of Americans and just one percent of the benefits would go to the poorest fifth of Americans. Under President Obama’s approach, 11 percent of the benefits of the extended tax cuts would go to the richest one percent of Americans and three percent of the benefits would go to the poorest fifth of Americans. Clearly Obama’s plan is the fairer one, though it’s hardly something to celebrate.
The White House and Congress will be working on a deal during the lame duck session to tide us over through 2013. If the only deal they can reach is a bad deal – one that preserves all those expensive Bush tax cuts – the President should reject that deal. We believe the public would support him if he did.
While we aren’t enthusiastic about any of the short term deals we know of, we are hopeful that 2013 can bring positive change to our tax code if Congress follows some basic principles. Like the historic tax reform of 1986, reform next year should close loopholes in the personal and corporate income taxes. Unlike ’86, however, it should not be revenue-neutral. Today, following decades of tax cuts, we have shrinking revenues and swelling deficits. So the next tax overhaul must raise revenues sufficient to fund the government and provide services citizens deserve and depend on. Real reform will also leave the code fairer than it is today by closing loopholes that have slowly eroded the progressivity the federal income tax was designed to deliver. We know that when you include local and state taxes, lower and middle income Americans are, in fact, paying their fare share. At Citizens for Tax Justice, our mission is advocating for those taxpayers, and we will continue to do so into 2013 as a still divided Congress and Democratic White House debate reform of the entire tax code.
“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.
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.
 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.
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.
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:
- 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.
- 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.
- 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. (The report also shows that the average tax break for the middle 20 percent of taxpayers would be $20 larger under Obama’s approach.)
 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 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
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.”
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
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.
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 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
New Analysis Finds GOP Approach to Bush Tax Cuts would Give Richest One Percent of Americans $50,660 Per Year More and Give Poorest 20 Percent $150 Less on Average than Obama’s Approach
Citizens for Tax Justice Compares the Two Approaches to Extending Some or All of the Bush Tax Cuts, Nationally and State-by-State
Washington, DC – Middle-income and low-income Americans would pay somewhat more in taxes under the Congressional Republicans’ approach to extending the Bush tax cuts than they would under President Obama’s approach, while high-income Americans would pay far less under the Republican approach, according to a new analysis from the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ).
Under the President’s approach, in 2013, the poorest 20 percent of Americans would receive an average tax cut of $270 while the richest one percent would get an average tax cut of $20,130. Under the Congressional Republicans’ approach, the poorest 20 percent of Americans would receive an average tax cut of $120 while the richest one percent would receive an average cut of $70,790.
The Bush tax cuts extension outlined by the President would cost one trillion dollars less over 10 years than would making all the Bush tax cuts permanent, as the GOP proposes.
“Both President Obama and Congressional Republicans have proposed to extend far too many of these unaffordable tax cuts,” said Robert S. McIntyre, director of Citizens for Tax Justice. “But if we have to choose between the Congressional Republicans’ and President Obama’s approach, the President’s proposal is fairer and more responsible.”
The national and state reports are all available at: www.ctj.org/bushtaxcuts2012.php.
The term “Bush tax cuts” refers to income tax cuts and estate tax cuts enacted in 2001 and 2003 and extended several times since then. In 2009, President Obama expanded some parts of these tax cuts that benefit low income and working families. In December of 2010, the President and Congress agreed to extend all of these tax cuts through the end of 2012.
Republicans in Congress have indicated that they would extend all of the tax cuts first enacted in 2001 and 2003, but not the 2009 expansions for lower income families. President Obama wants to extend the 2001 and 2003 tax cuts only for the first $250,000 a married couple makes annually, or the first $200,000 a single person makes. Obama also wants to extend the 2009 expansions.
The findings from CTJ and ITEP also show:
- Of the tax cuts going to Americans, under Obama’s approach, three percent would go to the poorest 20 percent of Americans, 9.9 percent would go to the middle 20 percent and 11.4 percent would go to the richest one percent.
- Of the tax cuts going to Americans, under the Congressional Republicans’ approach, one percent would go to the poorest 20 percent of Americans, 7.4 percent would go to the middle 20 percent of Americans and 31.8 percent would go to the richest one percent of Americans.
CTJ and ITEP are also releasing state-specific versions of this report showing the specific distribution of the benefits, and amounts of tax cuts, from each approach in each of the fifty states and the District of Columbia. All the reports are at www.ctj.org/bushtaxcuts2012.php.
The report also addresses the economic effects of tax cuts versus direct government spending and cites Moody Analytics research concluding that government spending is more stimulative by a factor of five or more than tax cuts.
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).
Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).
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.
In another example of Representation Without Taxation, on Thursday the House Ways and Means Committee reported out a bill that would repeal the medical device excise tax that was enacted as part of the Affordable Care Act and scheduled to go into effect next year. This week it goes to the floor for a vote which, according to the Associated Press, is largely a political maneuver which allows the House GOP to look like they’re fighting for jobs while conveniently unraveling funding for the Democrats’ health care reform; GOP leader John Boehner concedes the latter himself.
The medical device industry successfully lobbied to cut the rate down on the proposed excise tax, and now they are lobbying to repeal the tax entirely, threatening job losses, reduced innovation and higher costs – the usual corporate response to the suggestion of a tax.
And as usual, most of their claims are unfounded, indeed “not credible,” as a Bloomberg analysis concluded. Bloomberg and others cite one fundamental flaw in the industry’s own analysis: it ignores the increased profits from boosted demand for their product that will be created by the health care reform law.
Another (familiar) ploy the industry is using is hiding behind small businesses, communities and entrepreneurs, but the truth is that about 85 percent of the tax will be paid by very large firms like Johnson & Johnson, GE Healthcare, and Medtronic. Of course, it’s no coincidence that Medtronic, with its $16 billion in revenues last year, is located in the congressional district of the House bill’s sponsor, Rep. Erik Paulsen (R-MN).
While many healthcare companies pay substantial federal income tax, there are companies working to repeal the excise tax that happen to be long-time tax dodgers. For example, General Electric, the parent company of GE Healthcare, has paid an average 2 percent federal income tax rate over the last ten years. Our recent Corporate Taxpayers and Corporate Tax Dodgers study showed medical giant Baxter International had a 2008-2010 average federal income tax rate of negative 7.1 percent.
Curiously, Abbott Laboratories, the seventh-largest medical device manufacturer, has 32 offshore tax haven subsidiaries. That might explain why the company reports that it makes a lot of money in foreign countries, but generates losses in the U.S. – even though half of its revenues are here. Boston Scientific’s SEC filings suggest a similar strategy.
The medical device industry, which has been floundering for reasons of its own making, is squealing about a modest tax it’s likely to pass along to customers anyway. Directing more of its budget to innovation rather than lobbying might be a better solution for them, and for America’s health care consumers.
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.
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.
GOP Speaker Boehner Threatens Default if Spending Not Cut Yet Insists on Tax Cuts that Increase the Deficit
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.
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.
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.
Citizens for Tax Justice Responds to President Obama's Corporate Tax Proposal: President's 'Framework' Fails to Raise Revenue
Today the Treasury Department released “The President’s Framework for Business Tax Reform” outlining the Obama Administration’s ideas for corporate tax reform. Citizens for Tax Justice has been generating research on corporate taxes for over 30 years, most recently with its November, 2011 report, Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010. In response to the White House and Treasury Department release today, Citizens for Tax Justice Director, Bob McIntyre, issued the following statement:
“The corporate tax reform ‘framework’ released by the Obama administration today fails to raise revenue that could be used to make public investments in America’s economy and America’s future.
“The President has proposed to reduce the statutory corporate tax rate from 35 percent to 28 percent, make certain temporary tax breaks, including the research and experimentation credit, permanent, and add some new business tax breaks. In total, these tax cuts would cost us about $1.2 trillion over the next 10 years.
“To offset this cost, the President proposed in his fiscal 2013 budget to raise about $0.3 trillion from closing or reducing business tax loopholes. That leaves almost $1 trillion in further business tax reforms that would be necessary for the tax plan to break even, as the President say he wants to do. His 'framework,' however, leaves the sources of this $0.9 trillion in offsetting reforms mostly unspecified.
“We can and should collect more tax revenue from corporations. Right now, America's biggest and most profitable corporations are paying, on average, a ridiculously low amount in federal income taxes, and many of them are paying nothing at all.
“Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.
"It's very disappointing that the President has proposed what is at best 'revenue-neutral' corporate tax reform. In 1986, President Reagan and Congress passed a tax reform act that increased corporate tax payments by more than a third. In today's terms, that would be a corporate tax increase of more than a trillion dollars over the next 10 years. The corporate tax reform that we need today should do no less."
President Obama's 2013 Budget Plan Reduces Revenue by Trillions, Makes Permanent 78 Percent of Bush Tax Cuts
President Obama's fiscal year 2013 budget plan would cut taxes by $4.1 trillion over ten years. A brief report from CTJ explains that most of this cost results from his proposal to make permanent 78 percent of the Bush tax cuts, which would reduce revenues by $3.5 trillion over a decade. The budget plan does include some good proposals that, together, would raise $1.1 trillion over a decade. Of course, these revenue-raising proposals don't come close to offsetting the costs of the tax cuts.
Read the report.
We are still analyzing the President's latest budget plan, which was released today, but there are a few things we can say right now.
Unfortunately, President Obama has once again proposed to make permanent the vast majority of the Bush tax cuts. The administration manipulates baselines to pretend that allowing the expiration of a portion of the Bush tax cuts (which are already scheduled to expire under current law) raises revenue. The budget plan would actually make permanent 78 percent of the Bush tax cuts at a cost of $3.4 trillion over the next decade.
The budget plan includes other tax provisions, including about $1 trillion in tax increases and half a trillion in tax cuts. Of course, this means that the budget plan would not come close to raising enough revenue to pay for the parts of the Bush tax cuts that would be extended.
In some ways this budget plan is an improvement over President Obama's previous budget plans. For example, while the President would still extend the Bush income tax cuts for the first $250,000 of income for married couples and the first $200,000 of income for unmarried taxpayers, his previous budget plans had partially extended the tax cut for stock dividends even for incomes in excess of those amounts. His decision this time around to allow stock dividends received by the rich to be taxed just like any other income is a step in the right direction.
Certain questions remain to be answered. For example, the Buffett Rule is sensible in concept but it’s unclear how the administration would implement it. The budget document says that the President “is proposing that the Buffett rule should replace the Alternative Minimum Tax.”
It’s unclear that the Buffett Rule could raise enough revenue to offset the cost of repealing the AMT. Even if it did, that would seem to mean that no new revenue would be produced because repeal of the AMT would cancel out the revenue effect of enacting the Buffett Rule.
Another area where more detail is needed is corporate tax reform. The administration is said to be planning a more detailed approach to overhauling the corporate income tax in a way that is revenue-neutral.
The administration should not bother attempting the overhaul the corporate income tax unless this would help resolve one of the biggest challenges we have — which is raising revenue to pay for public investments.
CTJ Calculates Buffett Rule Would Raise $50 Billion in One Year and Affect Only the Richest 0.08 Percent of Taxpayers
Citizens for Tax Justice has calculated that President Obama’s “Buffett Rule” would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers — that’s just eight percent of the richest one percent of taxpayers.
During his State of the Union address, President Obama proposed that Congress enact his Buffett Rule, inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.
CTJ has long argued that the most straightforward way to fix this problem is to end the special low tax rate for capital gains and stock dividends.
A document released from the White House on Wednesday suggests the President would take a different approach. It explains that
the President is now specifically calling for measures to ensure everyone making over a million dollars a year pays a minimum effective tax rate of at least 30%. The Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions.
The last sentence apparently means that charitable deductions for millionaires would not be affected.
To calculate the $50 billion figure, we assumed that there would be a minimum tax that applies to adjusted gross income (AGI) minus charitable deductions. (We’ll call this modified AGI.)
We assumed that a taxpayer with modified AGI greater than $1 million would face a minimum tax of 30 percent of modified AGI. The taxpayer would pay whichever is greater, their personal income tax under the existing rules or this minimum tax.
Revenue Impact Would Depend on Details
Of course, taxes always have to be a little more complicated than that. We had to assume that this minimum tax is phased in over a certain income range rather than allow it to kick in fully for everyone with exactly $1 million or more in modified AGI. Otherwise, a person with modified AGI of $999,999 might have an effective rate of 15 percent, and if they make $2 more their effective tax rate will shoot up to 30 percent. Congress generally avoids enacting any tax rules that have this sort of “cliff” effect.
So we assumed that the minimum tax would be phased in for taxpayers with income between $1 million and $2 million. That means that only half of the minimum tax applies if you make $1.5 million, and the entire minimum tax applies if you make $2 million or more. This means that the Buffett Rule could raise less revenue or more revenue if Congress chose different rules to phase it in.
CTJ Report Explains Need for Buffett Rule
A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.
As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).
The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.
For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.
Photo of Warren Buffett via Track Record Creative Commons Attribution License 2.0
CTJ's Response to SOTU: Right about Stopping Offshore Tax Dodgers, Wrong about Cutting Taxes for Other Corporations
During his State of the Union address, President Obama said that "no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas." We couldn't agree more. However, a CTJ report explains that his proposed solutions fail to raise revenue, retain and expand the loopholes that allow corporations to avoid taxes, and mark a further retreat from earlier, stronger proposals.
Read the report.
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.
Some commentators have suggested that, because people with incomes exceeding $1 million, on average, pay higher effective tax rates than middle-income people, the problem targeted by President Obama’s “Buffett Rule” does not exist. As demonstrated in a new report from CTJ, the problem is not the effective tax rates of millionaires across the board but a particular class of millionaires whose income is mostly from investments. Investment income is taxed less than other types of income, allowing millionaire investors to pay a smaller percentage of their income in federal taxes than do many working-class people.
The report demonstrates that this problem is not isolated to rare cases. In fact, almost one third of taxpayers with income exceeding $10 million fall into this category (of taxpayers who rely on investment income for over half of their total income). Over 90 percent of taxpayers making between $60,000 and $65,000 (which includes Mr. Buffett’s famous secretary) rely on investment income for less than a tenth of their income — and pay a higher federal tax rate as a result.
The report also explains what Congress can do to implement the Buffett Rule and solve this problem. The first step, perhaps surprisingly, is to prevent repeal of health care reform, which includes a change in the Medicare tax that will take a limited first step in addressing this unfairness. Additional reforms are needed, which may include eliminating tax preferences for investment income or a surcharge on income exceeding $1 million as recently proposed by Senate Democrats.
Photo of Warren Buffett and Barack Obama via The White House Creative Commons Attribution License 2.0
Note to Senator Schumer: 3/4 of Married Couples with Incomes Between $250k and $300k would Keep All Their Bush Tax Cuts Under Obama Plan
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.
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.
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.
President Barack Obama nominated Alan Krueger to chair the White House Council of Economic Advisors on Monday and he will likely be easily confirmed. Although as a labor economist Krueger has earned many accolades for his robust work, including a seminal article defending the minimum wage, his record on tax policy is a little more mixed.
For example, in recent months Krueger voiced support for a jobs tax credit that would give companies $5,000 for every additional employee they hire. As Citizens for Tax Justice explained when President Obama proposed a similar plan, such tax credits are a poor way to encourage job creation because they inevitably go to companies who would have hired additional employees even without the credits. In fact, those companies that are struggling the most, those shrinking or unable to expand because of weak consumer demand, would receive no help from the credit.
The most controversial position Krueger has taken on tax policy was in a 2009 guest blog post arguing that a national consumption tax (specifically a 5% rate that would raise $500 billion) should be considered as one solution to the long run budget deficit. Many conservatives exaggerated the seriousness of this blog post, failing to mention Krueger’s caveat that this was “only as a suggestion for serious discussion,” and that he was “not sure it is the best way to go.”
In any case, a broad-based national consumption tax is the wrong policy because it would inevitably be severely regressive.
To be sure, Krueger has frequently stood up for good progressive tax policy. For instance, he has laid out the strong case for eliminating billions in tax subsides for oil and gas companies, opposed the ridiculous tax subsidies cities offer to sports teams and is a long time critic of the regressive Bush tax cuts.
As House lawmakers signal their intention to move forward with tax reform this fall, let’s hope we see Krueger in his new position focus on measures that will make our tax system more progressive and better for the overall economy.
Photo via Center for American Progress Creative Commons Attribution License 2.0
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.
New Report from CTJ: People Who Make $250,000 Should Stop Worrying: Obama's Income Tax Plan Targets those Who Make Over $1 Million
Recent articles in the New York Times and the Fiscal Times entertain the notion that President Obama's income tax plan will result in unaffordable tax increases for families who make $250,000 a year. One theme of these articles is that in some parts of the country, $250,000 is really not very much to raise a family on.
A new report from CTJ explains that this is wrong on several levels:
1. If enacted in 2011, 84 percent of the revenue savings from Obama’s plan to partially end the Bush income tax cuts would come from people whose income exceeds $1 million annually.
2. A married couple whose income is exactly $250,000 would see no change in their income taxes under Obama’s plan. In fact, most married couples with incomes between $250,000 and $300,000 would see no change in their income taxes. On average, married couples in this group would lose just one percent of their Bush income tax cuts, under Obama’s plan.
3. Only 2.6 percent of taxpayers will even have adjusted gross income above $250,000 (or above $200,000 for unmarried taxpayers) in 2013. Congress should target this group for higher taxes.
4. The attempts to show that $250,000 is really not very much to live on prove nothing, other than how wildly out of touch reporters and opinion-makers are with the rest of America.
Read the report.
In his speech on Wednesday addressing the budget deficit, President Obama skewered the House Republicans’ budget plan as painting “a vision of our future that’s deeply pessimistic.” He pointed out that if enacted, the budget proposed by House Budget Committee Chairman Paul Ryan would mean
- "A 70 percent cut to clean energy. A 25 percent cut in education. A 30 percent cut in transportation."
- "Cuts in college Pell Grants that will grow to more than $1,000 per year."
- Typical 65-year-olds would spend nearly $6,400 more annually on health care.
- Medicare would be turned into a voucher, and "if that voucher isn’t worth enough to buy insurance, tough luck – you’re on your own."
- 50 million would lose health insurance, resulting from Medicaid cuts and the repeal of the health care reform law.
- A trillion dollars in tax breaks for the rich (the extension of the parts of the Bush tax cuts that Obama wants to see expire).
"There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill," President Obama said of the Ryan budget plan.
Ryan’s Goal Is to Shrink Government, Not the Deficit
A report last week from CTJ explains that Ryan’s budget actually reduces revenue, compared to current law and compared to Obama’s proposed budget, which makes it pretty obvious that deficit reduction is not its real motivation. The Ryan plan would essentially make permanent the level of taxation enacted under President Bush and then overhaul the tax system to eliminate loopholes and put the revenue saved towards rate reductions.
The result would be that the highest rates for individuals and corporations would be just 25 percent, and tax revenue collected would equal just between 18 and 19 percent of GDP. To put this in perspective, note that spending was about 21 percent of GDP under President Reagan – and that was before the baby-boomers were retiring, before health care costs had climbed so dramatically, and before we became engaged in multiple conflicts in the Middle East.
The Ryan plan does not spell out in any detail what the resulting tax system would look like – and there’s a specific reason for this. Last year, when Congressman Ryan presented a detailed plan that would allow people to pay income taxes at a top rate of 25 percent, Citizens for Tax Justice found that the plan would cut taxes, on average, for the richest ten percent and raise taxes, on average, for all other income groups. Remarkably, the plan would also lose $2 trillion over a decade.
Even President Obama’s Approach Could Be Dramatically Improved
While President Obama’s approach is vastly more responsible and reasonable than the House Republicans’ plan, it still doesn’t do enough to raise revenue. President Obama would allow the Bush tax cuts for the rich to expire and wants to limit tax expenditures, which are the equivalent of spending but administered through the tax code.
Like his fiscal commission, Obama says he wants an overall deficit reduction plan that cuts spending by two dollars for every one dollar of new revenue. But given that we are one of the least taxed countries in the developed world, at very least that ratio should be reversed. To be sure, much of the new revenue should come from cutting what amounts to spending programs implemented through the tax code, as the President argues.
But it’s unclear exactly what he means when he says he wants to raise $1 trillion in new revenue. If he aims to raise $1 trillion compared to the “current policy baseline,” which assumes that the Bush tax cuts are extended forever, that is mostly accomplished by allowing the tax cuts for the richest two percent to expire, as he has already proposed.
But surely more Americans than just the richest two percent can afford to pay more, especially if budget reform is going to involve “shared sacrifice,” as President Obama says. And surely we can do more than just allow part of the Bush tax cuts to expire, which will happen anyway if Congress does absolutely nothing.
Finally, the President reiterated his call for corporate tax reform to make our businesses "more competitive." Frankly, what we need is to make our businesses pay more in taxes, particularly our corporations. Even Bush's Treasury concluded in a 2007 report that the share of profits paid in taxes is lower on average for U.S. corporations than corporations of other developed countries. To not even attempt to get more revenue overall from our corporate tax system is incomprehensible.
Preliminary Analysis of President Obama's Fiscal Year 2012 Budget: Plan Would Make Permanent 81 Percent of the Bush Tax Cuts
The budget outline released by President Obama this week, just like last year’s proposal, includes about $3.5 trillion in tax cuts over ten years. Most of that cost comes from his $3.1 trillion proposal to make permanent most of the Bush tax cuts, which would cost 81 percent as much as extending all the Bush tax cuts.
The President’s budget outline does include several laudable provisions to raise revenue, but not nearly enough to offset the costs of the proposed tax cuts.
The net effect of the tax proposals in the budget plan would be to reduce federal revenue by $2.8 trillion over ten years, compared to what would happen if the Bush tax cuts simply expired (as they will under current law if Congress does nothing).
Read the report.
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.
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.
(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.
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.
A minority of Senators made clear on Saturday that if the Bush tax cuts cannot be extended for the very richest taxpayers in America, then they will allow the tax cuts to expire for everyone.
Senate Republicans successfully filibustered a bill based on President Obama's tax plan to permanently extend the Bush tax cuts for the first $250,000 of income for married couples and the first $200,000 of income for unmarried individuals. The two percent of taxpayers with incomes above $250,000/$200,000 would therefore continue to enjoy part of the Bush tax cuts while the other 98 percent would continue to enjoy all of them.
Throughout months of debate over President Obama's tax plan, lawmakers and reporters often seemed to think that a person making one dollar over the $250,000/$200,000 threshold would lose all of the Bush tax cuts. CTJ's recent report shows this is entirely untrue. For example, it explains that married couples with incomes between $250,000 and $300,000 would only lose 1 percent of the Bush tax cuts, on average, under the Democratic tax plan.
The bill, introduced by Finance Committee Chairman Max Baucus, would also have allowed the estate tax to come back into effect but only at the levels that existed in 2009, with an adjustment for inflation. The bill would also have made permanent expansions in refundable tax credits for low-income families that were included in the economic recovery act enacted last year. Emergency unemployment insurance (UI) benefits, which recently expired, would have been extended for one year under the bill.
Unlike nearly every democratic institution on Earth, the Senate cannot approve anything without a super-majority of three-fifths of the chamber's votes. Democratic leaders were able to muster 53 votes for the tax bill, seven short of the 60-vote threshold to overcome a filibuster.
Voting with the Republicans were Joe Lieberman (D-CT), Ben Nelson (D-NE), Joe Manchin (D-WV), Jim Webb (D-VA), and Russ Feingold (D-Wisconsin). Unlike the others, Feingold made it clear that he voted against because he believed that this bill to extend tax cuts entirely for the first $250,000/$200,000 of income is simply too expensive.
The Senate held a second vote on a proposal introduced by Senator Chuck Schumer (D-NY) that was the same plan except that the tax cuts would be made permanent for the first $1 million of income. Republicans and Senator Lieberman voted against this bill also, but were joined by some progressive Democrats who believed that the $1 million threshold was too high.
"A minority of Senators are saying that the chamber must extend tax cuts for the extremely rich, or else low-income and middle-income families will lose their tax cuts, and people who are jobless through no fault of their own will receive no more help," said Bob McIntyre, director of Citizens for Tax Justice. "Even a proposal to extend the tax cuts for the first $1 million of income is not enough to satisfy this minority of Senators. Their disregard for working class Americans and their blind loyalty to multi-millionaires would be hard to believe if they were not on full display this weekend."
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.
The tax bill passed by the House yesterday (H.R. 4853) would make permanent two provisions that were included in the economic recovery act and which would otherwise expire at the end of this year. One makes the child tax credit more accessible to low-income working parents. The other reduces the marriage penalty in the EITC.
The bill introduced by Senate Finance Chairman Max Baucus, which Democratic leaders plan to vote on Saturday, would make these changes permanent as well as a third change in the recovery act that expands the EITC for families with three or more children.
For more information, see CTJ's recent state-by-state figures showing how each of these provisions impacts families with children.
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
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
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.
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.
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.
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.
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.
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...
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.
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.
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.
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.
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.
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.
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.
New Report from CTJ: Group of House Democrats Support Tax Preferences for Wealthy Investor Class that President Reagan Ended
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.
New Data from CTJ Shows How Obama Tax Plan and Senate Republicans' Tax Plan Affect Taxpayers in Each State and Each Congressional District
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.
President Reaffirms Commitment to Extend Tax Cuts for 98%; House GOP Leader Fights for the Richest 2%
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.
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.
More Polls Show Majority Want Tax Cuts for the Rich to Expire, More Analysts Confirm that It Won't Hurt the Economy
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.
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.
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.
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.
Senate Republicans: $35 Billion for Unemployed Is Too Much, But a Trillion in Tax Cuts for the Rich Pays for Itself!
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.
New CTJ Report: Extending Bush Tax Cuts for High-Income "Small Business" Owners Would Further Enrich the Wealthiest Taxpayers While Doing Nothing to Create Jobs
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.
The Coalition on Human Needs is circulating a sign-on letter for organizations in support President Obama's proposals to make permanent some of provisions in the recovery act that expand refundable tax credits to help working families.
If you are authorized to sign on behalf of an organization, please sign your group onto this letter to preserve and build upon tax credits for low-income children, working families, and students. The deadline is Friday, April 30.
Read the letter.
Sign the letter.
CHN is seeking local, state, and national organizations to sign this letter, which will be sent to every Representative and Senator in Congress. Congregations, service providers, labor, civil rights, social action, policy, and advocacy groups are all asked to join the letter. PLEASE SHARE THIS INFORMATION WITH OTHERS IN YOUR STATE.
Poverty and hardship are rising across the nation. Tax credits can help families buy what they need, protecting children and boosting the economy too. The Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit (for low-income college students) can make a real difference in providing income to millions of families. But if Congress does not act, these tax credits will expire.
Why it matters: A family with two children with a parent working full-time at the minimum wage now receives about $1,750 from the Child Tax Credit. If the current tax credit law expires, this low-income family will lose $1,500 — and receive only $250. If the law expires, families with 3 or more children will lose up to $629 in their Earned Income Tax Credit. And, if the law expires, low-income students will lose up to $1,000 to help with their college expenses.
At a time when unemployment is high, and near depression levels among people with little education, in communities of color, and in some urban and rural areas, this is no time to drastically reduce the help low-income tax credits provide.
The voices of local, state, and national organizations are needed to show Congress very strong support for preserving and improving these tax credits. Please add your voice by signing this letter — and forward this request to other organizations.
Congress will act on extending tax cuts for the middle class, and must also decide about tax cuts for the rich and for business interests. Please make sure they remember the millions of low-income families who need help the most — and whose help provides the biggest economic boost.
The 2009 federal income taxes that come due on April 15 have been cut for nearly all working Americans, including Americans at all income levels, by the Recovery Act signed by President
Obama last year. But no one seems to be aware of this. Recent polls indicate that the vast majority of Americans think that the President either raised taxes or left them the same for 2009.
CTJ has new state-specific reports that aim to clear up this widespread misunderstanding. They show that the President cut taxes for working people at all income levels for 2009 and they show who was helped by each individual tax break.
Read the fact sheet and report for your state.
Americans know that taxes are necessary to fund the services government provides like roads, schools, and social security. We contribute so that our country can build and maintain the necessary infrastructure and public goods and provide a safety net for all of us. At the same time, Americans think that the wealthiest among us aren't paying their fair share.
And yet those who support the previous administration's policies of slashing taxes for the rich will be very effective in making their voices heard on Tax Day. They have a message that sounds appealing (usually involving lower taxes with no negative repercussions) and a network of supporters with plenty of cash to amplify their message.
The following list describes how you can cut through the nonsense and stand up for tax fairness this April 15.
CTJ: Obama Cut Taxes for 98 Percent of Working Americans
CTJ has a new fact sheet showing that President Obama has cut taxes for 98 percent of working Americans in 2009. State-by-state reports are included. Polls show that the vast majority of people think that Obama either raised their taxes or left them the same for 2009, and these publications aim to clear up that widespread misunderstanding.
US PIRG: How Much Tax Havens Cost Ordinary Americans
The U.S. Public Interest Research Group reminds taxpayers that, while we do our duty and file our taxes, there are corporations and individuals out there who shirk this responsibility by using offshore tax haven countries to hide assets. On April 15, U.S. PIRG is sponsoring post office demonstrations and releasing a new report Tax Shell Game: What Do Tax Dodgers Cost You? They are encouraging folks to send in post cards to their Members of Congress to send a message to Washington that the American people deserve a better system.
Jobs with Justice: Tax Wall Street Day of Action
Jobs with Justice is organizing a Tax Wall Street Day of Action on April 15th. They are calling on supporters to deliver letters to national banks and collect petition signatures at local post offices as Americans stop by to mail their tax returns. The petition will ask Congress to tax Wall Street speculation.
UFE: Take the Tax Fairness Pledge
United for a Fair Economy has created the Responsible Wealth Tax Fairness Pledge where you can estimate your savings from the Bush tax cuts and pledge them to an organization that works for tax fairness. By the end of 2010 the Bush tax cuts will have cost more than $2.5 trillion in revenue that could have been used for critical investments in education, infrastructure or to reduce the deficit.
Are You Tired of the Tea Party? Join the Other 95%
President Obama cut taxes for 95 percent of working Americans (or 98 percent, if you count AMT relief) in 2009. But only 12 percent know it. Join the "other 95 percent" and say "Thanks for our tax cut, President Obama."
Or Join the Coffee Party
Tired of the tempest in a teapot, Coffee Party USA was started to encourage folks to "get together and drink cappuccino and have real political dialogue with substance and compassion." You can join the movement or start your local chapter here. Their motto: Wake Up and Stand Up.
IPS: More About the Way the World Is
The Institute for Policy Studies offers an analysis of the federal income tax system that seems more like two different systems: one for the wealthy and powerful and another one for the rest of us. Their paper includes analyses of the "flat tax," the national debt, and the myths about tax cuts for the wealthy allegedly spurring the economy.
CBPP on the Tax Foundation Tax Freedom Day Report: If Only We Were Rich
The Center on Budget and Policy Priorities has published a report refuting the oft-quoted numbers from the Tax Foundation about how many days people work each year just to pay their federal income taxes. As CBPP points out, the analysis is heavily skewed by the amount of income tax paid by the wealthy. Eighty percent of U.S. households pay tax at a lower rate than the Tax Foundation's estimated "average" federal obligation.
Wealth for the Common Good: Shifting Responsibility
Wealth for the Common Good has released a report Shifting Reponsibility: How 50 Years of Tax Cuts Have Benefited America's Wealthiest Taxpayers detailing how America's highest earners have seen their taxes drop by as much as two-thirds over the last 50 years. The trend of "asking less from those with more" has contributed to perhaps the greatest income inequality the U.S. has ever seen. The report calls for various measures to mitigate this dangerous trend and restore revenue to the federal treasury.
NPP: Where Did Your 2009 Federal Income Tax Dollars Go?
The National Priorities Project has released a report Where Do Your Tax Dollars Go - Tax Day 2010 showing how federal tax dollars were spent in 2009. Out of every dollar, 26.5 cents goes for military-related spending, 13.6 cents goes to pay interest on the debt, and only 2 cents goes towards education.
CAP: Why Cutting Discretionary Spending Won't Solve Our Budget Imbalance
The Center for American Progress has developed an interactive pie chart to help you learn about the federal government's discretionary spending, including whether cuts in those programs will really help reduce the federal deficit. Look at What is Non-Defense Discretionary Spending here.
UFE: How Will the States Close Their Budget Gaps?
United for a Fair Economy's Tax Fairness Organizing Collaborative just published a report Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps." The report identifies pragmatic principles for closing state budget gaps in ways that enhance economic recovery, ongoing stability, and more widely shared prosperity. Also see their report Leaving Money on the Table showing that residents in states that rely heavily on the sales tax instead of an income tax pay much more federal income taxes as a result.
CTJ: Don't Believe the Hype About the Rich Paying All the Taxes
On Tax Day, you'll hear anti-tax people say that the rich are paying a disproportionate share of taxes. They're wrong. When you look at the tax system as a whole, including federal, local, and state income, payroll, excise, and sales taxes, the system is just barely progressive. A CTJ analysis shows that when you include those taxes, effective tax rates are almost flat.
The Medicare tax reform proposal included in the President's proposal several weeks ago was slightly modified in the compromise health bill that was released by Democratic leaders in Congress yesterday.
The entire 3.8 percent Medicare tax would also apply to investment income to the extent that adjusted gross income (AGI) exceeds $200,000/$250,000. The President's proposal would have applied the Medicare tax to unearned income at a rate of 2.9 percent, and included a phase-in that worked a little differently. CTJ's recent report on the President's proposal found that only 2.3 percent of taxpayers would be affected by it in 2014. (The change would go into effect in 2013). Given how similar the revised version is, the percentage of taxpayers affected would be very similar.
Tax policy is an area in which two people can look at the exact same set of facts and come to exactly opposite conclusions. Take the American Enterprise Institute's latest assault on the Medicare tax reform that President Obama has included in his health care reform plan.
The President has adopted an idea that CTJ has championed for months, to change the Medicare tax so that it no longer exempts investment income and to make the tax more progressive. The President would raise the Medicare tax rate for earnings exceeding $200,000 for unmarried taxpayers and $250,000 for married taxpayers, and he would apply the existing 2.9 percent Medicare tax to investment income for those with adjusted gross income (AGI) above $200,000/$250,000.
CTJ's recent report on this proposal found that only 2.3 percent of taxpayers would be affected by this tax in 2014. (The tax would go into effect in 2013).
But that's no comfort to Alan D. Viard and Amy Roden, who argue against this tax reform in AEI's online journal. They write:
"Of course, the high-income cutoffs mean that the new Medicare tax wouldn’t apply to most American savers. But the savers hit by the tax are precisely the ones who provide the largest volume of funds to finance investment in our economy. In 2007, tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a staggering 84 percent of all net capital gains. We can’t afford to discourage this group from investing in America’s future."
So they fully agree with us that the sort of income they don't want Congress to tax predominately flows to the rich.
As a judge would say, the facts in this case are not in dispute.
What is in dispute is whether we have to avoid taxing the types of income that mostly flow to the wealthy in order to keep our economy running smoothly. AEI says yes, we need to have preferential rates in some taxes for these types of incomes (like the capital gains and dividends break in the income tax) and wholesale exemptions in other taxes (like the Medicare tax).
We disagree. We have seen no evidence that the economy functions better when taxes on investment income are slashed or eliminated. Even when it comes to capital gains, which is where libertarians think they have their strongest case, there is no evidence that tax cuts have enhanced economic efficiency. Capital gains income certainly has fluctuated as a result of the ups and downs in the overall economy, and libertarians often attribute the upswings to tax cuts for capital gains. Sadly for them, capital gains realizations have, throughout the Bush years and today, been lower than they were at the end of the Clinton years, when the top rate for capital gains was higher.
Taxing investment income the same way that income from work is taxed is only fair. The President's Medicare tax reform is a step in the right direction. It would end the current exemption in the Medicare tax for investment income to help finance a health care reform that really will help our economy to function more efficiently.
New Report from CTJ: President's Medicare Tax Reform Would Affect about 2% of Taxpayers and End the Exemption for Wealthy Investors
A new report from Citizens for Tax Justice examines the Medicare tax reform included in the health care plan recently put forward by President Obama. The report concludes that this reform would affect only 2.3 percent of taxpayers in 2014. The richest one percent would pay about 84 percent of the resulting tax increase, and the richest five percent would pay virtually all of the tax increase.
The report also discusses one flaw in the President's proposal: It would preserve what is often called the "John Edwards loophole," which is a scheme that some wealthy owners of "S corporations" use to avoid the Medicare tax.
New data from the IRS show that in 2007 the richest 400 taxpayers in America increased their incomes by 31 percent over the previous year, increased their share of total income in America, and paid an even lower effective tax rate than ever before.
Writing for Tax Analysts, David Cay Johnston finds that the average income of the richest 400 grew from $263.3 million in 2006 to $344.8 million in 2007. Meanwhile, their effective income tax rate fell from 17.17 percent in 2006 to 16.62 percent in 2007.
As usual, a major cause of the low effective tax rates is the preferential rate for capital gains and stock dividends, which are taxed at a top rate of 15 percent instead of the top rate of 35 percent that applies to other income for the very rich. Capital gains made up 66.3 percent of income for the top 400 in 2007, up from 62.8 percent in 2006.
The data seem to highlight the need to allow the Bush tax cuts, which cut the top rate for capital gains and stock dividends to 15 percent, to expire as scheduled at the end of 2010.
The report released last week by Citizens for Tax Justice on the President's budget argued that Congress should at least allow the Bush tax cuts to expire for the rich (which Obama defines as married couples with incomes above $250,000 and unmarrieds with income above $200,000) and should enact at least as many revenue-raisers as the President proposes.
New CTJ Report on President Obama's FY2011 Budget Proposal: The Federal Government Should Collect at Least as Much Revenue as Obama Proposes
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.
Late last year, CTJ published a report examining the lack of scrutiny directed toward tax expenditures, and the repeated promises to address this problem made by past Administrations. Unfortunately, the President’s most recent budget proposal shows no signs of progress on this issue. As CTJ points out in an op-ed in today’s Sacramento Bee: “for the second year in a row, the Obama administration has chosen [in its budget] to simply copy-and-paste the Bush administration’s language on this issue, complete with all the same promises about what will be done at some point over the ‘next few years.’”
Read the op-ed.
President's State of the Union Address Acknowledges - Partially - the Problems with the Bush Tax Cuts
"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.
On Tuesday, President Obama put forth ideas, some good and some not as good, to create jobs. The more misguided proposals involve using the tax code to reward businesses, while the best ideas involve direct spending.
For example, he proposed the elimination of capital gains taxes for small business investment and an extension of the break that lets small businesses immediately deduct (expense) a larger amount of their capital investments.
The capital gains break is particularly problematic. If this provision works as existing similar capital gains breaks work, it would mean that anyone who buys an interest in a company that qualifies as a "small business" within a certain time period can hold onto that interest for as long as they like -- say, 20 years or longer -- and then sell it without paying any tax on the gain.
Of course, no investor knows whether or not a small company will grow and last that long. The company could go out of business in a couple years. Or the company could be Microsoft.
But, more to the point, it's not obvious that this would help a small business today to create jobs. Investors don't want to put their money in a venture unless they think there is some demand for the goods or services that would be produced. So, what's needed now to create jobs is a boost in demand for goods and services. Investors would respond by creating or expanding business, meaning they would hire more people to work more hours. Business owners only expand like this if they can profit, and that resulting profit is what causes stocks to become more valuable, which is what causes shareholders to have capital gains.
The President's capital gains proposal gets this all backwards by aiming a tax cut at the very end of that process, at the capital gains, and assuming that demand will materialize on its own as long as a tax cut encourages an increase in the supply of capital. At risk of drawing an alarming comparison, the proposal is, well, supply-side in its logic.
The President also says he wants to work with Congress to "create a tax incentive to encourage small businesses to add and keep employees." This could be a mediocre idea or a bad idea, depending on exactly what he's thinking.
If he's thinking of a payroll tax holiday, this could, in theory, produce some increase in demand if it means that workers who pay less in payroll taxes will spend the increase in their take-home pay. But to the extent that they save the extra money, it doesn't produce the boost in demand that is needed right now.
If the "tax incentive" the President is thinking about is a tax credit that goes to businesses for creating jobs, that could be even more problematic. There has been a lot of talk about giving businesses a credit for the amount by which they expand their payroll, and even making the credit refundable so that companies that are not currently profitable can benefit from it. Like the capital gains tax break, this proposal would do little to boost demand. But that's only the beginning of the problems.
Another problem is that it raises the question of how to treat new companies. Would they get the credit, and how would it be calculated since all their jobs are new? If they get the credit, what's to stop someone from liquidating their existing company and starting a new company that is different in name only? Perhaps more alarming is the fact that a lot of companies will create more jobs anyway, so a lot of the revenue would be a reward to firms for doing something they would have done even without the tax break.
A proposal that has been recently promoted by the Economic Policy Institute argues that even if one takes these problems into account, a well-designed tax credit can create jobs in a cost-effective way. Even if only a fraction of the jobs created are the result of the credit, the authors figure that five million jobs could be created over two years, at a total cost of about $5,400 per full-time job (or full-time job equivalent) created as a result of the credit.
Given the many questionable assumptions needed to come to this conclusion, we think a much surer bet for job creation would be plain old government spending. Thankfully, direct spending by the government was also included in the proposals the President discussed.
For example, he mentioned extending aid to unemployed and low-income people as well aid to states. This type of government spending would result in increased consumption (and therefore increased demand for goods and services) almost immediately.
As a recent report from the Center on Budget and Policy Priorities explains, aid to states is particularly important right now, because state governments are already planning their budgets for fiscal year 2011, when most of the aid they received in the recovery act is supposed to end. There's usually a lag between an economic recovery and state governments' recovery of their revenue streams, so a lot of states will be cutting services and staff even if the economy is expected to improve in 2011.
Federal aid to state and local governments that allows them to save jobs that they are about the eliminate provides an immediate and clear benefit. It maintains the income that the otherwise eliminated state and local government employees will spend, which boosts demand for goods and services above where it would be if the federal government did not provide this aid.
The President is right that Congress cannot improve our economy by focusing single-mindedly on the budget deficit. The federal government needs to provide the conditions for job creation. Let's hope that this effort doesn't get diverted into a tax-cutting spree that makes good sound bites without addressing our underlying economic problems.
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.
Coalition of Advocates, Think Tanks and Unions Begins Campaign to Promote Progressive Revenue Options to Fund Health Care Reform and Other Initiatives
Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.
These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)
RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.
RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.
The statement lists three broad principles to guide Congress's efforts to find revenue:
1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.
2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.
3. Responsibility. We should not saddle future generations with unsustainable levels of debt.
The statement also lists examples of the kinds of tax policies RRAN supports:
- raising revenues from upper-income households;
- assessing a significant tax on large estates;
- reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
- closing financial industry, oil and gas, and other inefficient corporate loopholes; and
- reducing tax preferences for unearned as opposed to earned income.
For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org
Another Win in the War Against Tax Havens: Obama Administration Puts Panama Free Trade Agreement on Hold
Assistant U.S. Trade Representative Everett Eissenstat told the Senate Finance Committee yesterday that the administration has put the Panama Free Trade Agreement on hold while the administration develops a "new framework" for trade. Some Democratic members of Congress have been pressuring the administration and Speaker Pelosi to delay approval of the agreement until a Tax Information Exchange Agreement (TIEA) has been completed with Panama, a known tax haven. TIEAs enable two countries' governments to exchange information necessary to prosecute offshore tax evasion (although arguably many of the existing TIEAs are so weak as to be useless). Panama and the U.S. began negotiations on a TIEA back in 2002, but Panama has never finalized it. The administration and Congress should, at very least, refuse to reward countries that are uncooperative with U.S. tax enforcement efforts with enhanced trading relations.
The national advocacy group Public Citizen issued a report on April 29th explaining the issues. Lori Wallach, director of Public Citizen's Global Trade Watch division said, "Members of Congress wouldn't vote to let AIG not pay its taxes or to give Mexican drug lords a safe place to hide their proceeds from selling drugs to our kids, but that's in essence what the Panama FTA does." She argued that the trade agreement directly conflicts with the goals of regulating finance and closing tax havens. Thankfully, the Obama administration seems to be listening.
On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.
A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.
Two New Reports from Citizens for Tax Justice Examine Offshore Tax Abuses and the President's Proposals to Address Them
On May 4, President Obama proposed several measures to address overseas tax avoidance and tax evasion. As explained in two new reports from Citizens for Tax Justice, these proposals are steps in the right direction but could be stronger.
For example, the President proposes to limit the rules allowing corporations to "defer" their U.S. taxes on foreign income, but he would largely exempt technology and pharmaceutical companies from even the weak limits he proposes, instead of simply repealing "deferral" altogether. He proposes sensible steps to reduce abuses of the foreign tax credit and the "check-the-box" rules that allow multinational corporations to cause their subsidiaries' income to "disappear." His proposals to crack down on the use of secret accounts in offshore tax havens are also positive steps but could be stronger.
Read the two new reports:
A new report from Citizens for Tax Justice answers many of the questions that are frequently asked about taxes during this time of year and clears up the old myths that are still accepted by many as fact. Here is just a sample of some of the questions that are answered:
Question: Does President Obama plan on raising our taxes?
Question: There might be cyclical downturns and upturns in the economy that no one can control, but don't tax cuts help us climb out of downturns a little faster?
Question: What are "tax havens" and why are some people in an uproar over them?
Question: What does it matter to me if someone else is hiding their income from the IRS?
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.
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.
Special Alert about President Obama's Budget Proposal from Our Friends at the Coalition on Human Needs:
- Learn about this transformational budget during a FREE webinar this Thursday, March 5 at 2pm eastern time (more details below)
- Organizations that wish to support and build upon President Obama's priorities please SIGN a statement online. Read statement here.
President Obama's Budget:
The Path to Rebuild and Renew America Now
Thursday, March 5, 2:00 - 3:00 p.m. eastern time
(Once registered you will receive instructions on how to log in, and explanatory budget materials via email. To participate, you need to be at a computer.)
This webinar will show how the President's budget would invest in health care, renewable energy, education, and more, laying a new foundation for growth that benefits us all. The budget makes an important - make that historic - down payment on renewing opportunities for Americans to join the middle class and be protected from poverty. The webinar will describe the transformational choices in the budget - a long-term plan to pay for the investments we need by raising revenues from those who can afford to pay and by cutting waste in the military and elsewhere. And it will describe a new campaign to support the President's responsible budget priorities - a campaign that needs your help.
- Human Needs Choices in the Budget:
Deborah Weinstein, Executive Director, Coalition on Human Needs
- Environmental Priorities:
Ivan Frishberg, Political Director, Environment America
- The Campaign - Rebuild and Renew America Now:
Alan Charney, Program Director, USAction
- Donald W. Mathis, Moderator, President and CEO, Community Action Partnership
There will be time for questions!
This webinar is co-sponsored by organizations including the Coalition on Human Needs, ACORN, AFSCME, Center for Law and Social Policy, Citizens for Tax Justice, Community Action Partnership, Environment America, Food Research and Action Center, Friends Committee on National Legislation, Health Care for America Now, Jewish Council for Public Affairs, National Association of Social Workers, National Immigration Forum, National Women's Law Center, NETWORK: a National Catholic Social Justice Lobby, Public Education Network, RESULTS, United States Students Association, USAction, Wider Opportunities for Women, and YWCA USA (list in formation).
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.
Congress seems set to approve, before their Presidents' Day recess, a final economic stimulus bill that marks a victory for progressives and economists who argue that federal government spending and aid for working class families can kickstart the economy far more effectively than tax cuts for businesses or the investor class.
The agreement hammered out this week by a House-Senate conference, which is presumably the final bill, will cost about $787 billion. Around 40 percent of that will go to tax cuts, most of which will be in effect for two years. Almost half of these tax cuts are progressive breaks for families, including the refundable Making Work Pay Credit, an important expansion of the refundable part of the Child Tax Credit for low-income families, a modest expansion of the EITC, and a new partially refundable education credit (the American Opportunity Tax Credit).
According to the official cost projections from the Congressional Joint Committee on Taxation (JCT), the tax provisions categorized as "business" tax cuts (which does not count several provisions that do benefit businesses, like energy incentives and provisions relating to tax-exempt bonds) will only make up 1 percent of the total cost of the bill. Even if we define business tax cuts as including the energy incentives and other provisions that do benefit businesses, these only make up around 7 percent of the total cost of the stimulus bill.
Some lawmakers felt a political need to keep the total cost of the bill below $800 billion. It is unfortunate that some of that was filled up with a $70 billion reduction in the Alternative Minimum Tax (AMT), which is not likely to stimulate the economy (as explained in the following article).
But overall, the bill marks a bold and effective step by the federal government without funneling very much of the benefits towards corporate tax breaks. While the bill is not perfect, it's hard to complain about it.
For more on the stimulus package, see the following Tax Justice Digest articles:
Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back
Even a Pinch of Tax Reform: Stimulus Package Includes Provision to Rescind the Bush Treasury's "Wells Fargo Ruling"
CTJ has long argued that some tax cuts could have a chance of effectively stimulating the economy -- if they are extremely targeted to poor and working class families. Several tax credits meeting this criterion were included in the House and Senate stimulus bills, although the details differed. CTJ released state-by-state fact sheets showing how families with children would be impacted by these tax cuts, and in many states families would gain between $800 and $1,000 in 2009 alone. The conference agreement does include these provisions, although some of them are scaled back somewhat.
1. Making Work Pay Credit (MWPC)
This was originally proposed by Barack Obama during his presidential campaign as a refundable tax credit of $500 for working people, or $1,000 for couples. Technically, the credit would be capped at 6.2% of earnings up to $8,100 (or twice that for married couples), meaning this credit would be the equivalent of a refund on Social Security taxes paid on that amount of earnings. The House and Senate bills both included this and only differed on the income limits and some other details. The conference agreement, however, limits the MWPC to $400 for singles and $800 for married couples. The credit will also be dribbled out over time through a reduction in withholdings, since some policymakers have decided that simply issuing checks (as was done with the rebate checks sent to households last year) results in families saving the money, which will not stimulate the economy immediately.
2. Expansion in the Earned Income Tax Credit (EITC)
Currently, low-income workers with no children can sometimes receive a very small EITC equal to a maximum of 7.65 percent of eligible earnings, while the maximum EITC for families with children is 34 percent for those with one child and 40 percent for those with two or more children. Under the House and Senate bills, families with three or more children could receive a benefit equal to a maximum of 45 percent of eligible earnings. The maximum benefit under current law is phased out at an income level that is higher for married couples than for singles. The bills would increase that difference, further reducing the "marriage penalty" in the EITC. These changes are included in the conference agreement. The total cost of these changes to the EITC is about $4.7 billion, which is much less than the cost of other provisions and this probably accounts for their survival in the final agreement.
3. Making the Refundable Portion of the Child Tax Credit (CTC) More Readily Available for Poor Families
Currently a parent who earns less than $12,550 in 2009 is too poor to benefit from the $1,000 per-child credit. People who pay federal payroll taxes but earn too little to pay federal income taxes do not benefit from a tax credit unless it is refundable. Currently the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). The House-passed bill would have removed this earnings threshold so that the refundable portion of the CTC would be equal to 15 percent of any earnings (the maximum credit would remain unchanged at $1,000 per child). The Senate-passed bill settled on a less generous provision retaining the earnings threshold but lowering it to $8,100.
Citizens for Tax Justice released a one-page fact sheet on Tuesday night showing how families in each state would be affected by the House and Senate provisions and how many more children would be helped by the House version compared to the Senate version. The conference agreement steers a little closer to the House version, setting the earnings threshold at $3,000.
New CTJ Report: Preliminary Analysis of Obama's Stimulus Tax Cuts: Could Be Worse, Could Be a Lot Better
President-elect Obama and Congressional leaders are discussing plans for economic stimulus legislation to be enacted in the coming weeks or months. The two-year package being discussed is said to cost around $775 billion and a surprisingly large $300 billion of that would go towards tax cuts.
A new report from Citizens for Tax Justice examines some of the major tax cuts that are being discussed as possible components of the stimulus proposal. Tax cuts are generally less effective in stimulating demand than direct government outlays. But tax cuts targeted to the people who are most likely to immediately spend any money they receive, namely low- and middle-income people, are more effective than upper-income tax reductions.
The report explains that Obama's "Making Work Pay Credit," (a refundable $500 credit for each working spouse) could be sufficiently targeted if improved from its current form. The report also finds that improving access to the Child Tax Credit for poor families, which has also been discussed as a possible component of the stimulus package, would be much more effectively targeted.
The report also discusses why business tax breaks that are being considered as part of the package are unlikely to help stimulate the economy and mitigate the current recession.
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.
New State-by-State Estimates from CTJ Show that Only 2.5 Percent of Americans Would Lose Any of Their Bush Tax Cuts Under Obama's Tax Plan
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."
Citizens for Tax Justice has recently released several reports on the tax issues being debated during this presidential election season.
Last week CTJ released this 15-page report on the tax plans offered by the two candidates. The report includes estimates of the distributional and fiscal effects of both candidates' plans in 2012, a year when almost all of the provisions of either plan would be in effect if enacted. These estimates include the effects of making the Bush tax cuts permanent (partially, in Obama's plan, and almost entirely, in McCain's plan) as well as their proposed changes to the AMT, corporate tax, and the other tax changes they propose.
The report finds that Obama's tax plan would give a larger tax cut, on average, to taxpayers in the bottom 60 percent of the income distribution than McCain's plan. Interestingly, while Obama's plan would give a small tax cut, on average, to the richest one percent, McCain's plan would give this group an average tax cut that is 43 times as large.
In addition to the tax plans that both candidates have been promoting for months, McCain and Obama both have recently proposed new, temporary tax cuts as a way to stimulate the economy and help people avoid the consequences of the downturn in the market. As this report explains, neither of the candidates' tax cuts seem very promising when it comes to helping Americans who are genuinely struggling, but McCain's proposals are particularly alarming because their benefits would be heavily targeted to the rich. He proposes to slash the capital gains rate, which would further bias the tax code against work and in favor of people who live off their wealth, and we estimate that over three fourths of the benefits would go to the richest one percent.
McCain also proposes that withdrawals of up to $50,000 from 401(k)s and IRAs, which are currently taxed as ordinary income, be subject to a top income tax rate of 10 percent. This obviously does nothing for a senior whose income is too low to trigger income tax liability or whose taxable income does not exceed the 10 percent bracket. But it would be a real boon for a very rich senior who would otherwise pay income taxes at a rate of 35 percent on such a withdrawal.
This report explains in more detail why lawmakers should not take up McCain's proposal to expand the existing loophole for capital gains, and why they should move in the opposite direction and start taxing investment income just like any other income. Anyone who thinks that doing away with the lower rates for capital gains and dividends is too radical an idea is reminded that Congress has done it before -- under the leadership of President Reagan.
No discussion about this presidential race would be complete without some mention of Joe the Plumber, the man who asked Obama about how he would be affected by Obama's tax plan if he became a small business owner. Obama responded that someone like Joe needs a tax cut now, when he's working his way up and saving money, rather than later on when he's joined the ranks of the very richest Americans. We also note the oddity of McCain professing to be worried about a tax code that punishes this man's hard work while proposing to expand the very loopholes that bias the tax code against work.