Tax Justice Digest stories about Bush Tax Cuts
McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."
A report released this week from Citizens for Tax Justice explains how "tax day" has changed under President George W. Bush. The answer for most Americans is: very little. Despite claims made by the President and his supporters, the tax breaks enacted after 2000 provide little benefit for the middle-class. However, for the richest one percent of American families, tax day is considerably easier. Once the President's tax cuts are fully phased in, the majority of the benefits will flow to this small group of lucky families.
What has changed for most Americans is the very real threat posed by the increased national debt resulting from these tax cuts. The national debt must eventually be paid off with tax increases or cuts in public services that Americans -- particularly the middle-class -- rely on.
The report explains that:
- The tax cuts received by the typical American are nowhere near as large as the President and his supporters imply, and are in fact too small to make any difference in the life of a typical American family.
- When the Bush tax cuts are fully phased in, the majority of the benefits will go to the richest one percent.
- If the Bush tax cuts are made permanent, as the President proposes, the cost will be $5 trillion over the 2011-2020 period. To put that in context, the federal government collected $2.6 trillion in revenue last year.
- The Bush tax cuts received by the richest one percent in 2008 will be more than the funding received by the Department of Education, almost twice as much as the funds received by the Department of Homeland Security and over ten times as much as received by the Environmental Protection Agency.
ABC news anchor Charlie Gibson perpetuated a myth about taxes at the Democratic presidential debate on Wednesday night. Gibson said of the capital gains tax that “in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.” He asked Senator Obama, who has signaled that he would raise the capital gains tax from its current level of 15 percent to 28 percent, why he would bother doing this if it would actually reduce revenues.
There is just one problem. What Charlie Gibson said is not true. Revenues from capital gains do not rise when the tax is cut. They rise when the economy is booming and they collapse when the economy tanks. In fact, revenue from capital gains taxes is currently well below the peak it reached during the
A small group of ideologues associated with “supply-side economics” believes that tax cuts can actually increase revenues. While this notion is rejected by most mainstream economists and sounds ludicrous to the average person, members of the media and Congress seem unusually susceptible to being hoodwinked into believing it. Their general idea is that if we lower capital gains taxes, there will be more capital gains realizations (meaning more people sell their property that has gone up in value) because the tax on that profit has been cut, and this will lead to revenue increasing overall.
Even if there are more realizations as a result of a capital gains tax cut, the resulting revenue will be nowhere near enough to make the tax cut budget-neutral, much less revenue-enhancing.
The nearby chart shows that the ups and downs in revenue collected by the capital gains tax seem to have more to do with what’s happening in the broader economy than with tax policy. In the early and mid-1990s, when the top capital gains tax rate was 28 percent, the revenues collected by the tax shot through the roof. They continued to climb after the rate was lowered to 20 percent in 1997, but this looks more like the continuation of a preexisting trend linked to economic prosperity rather than a response to the change in the rate. Then in 2001 and 2002 the revenues collected by this tax fell precipitously. This was not following any change in tax policy at all, but clearly linked to the bursting of the dot.com bubble and its ramifications on the stock market.
Capital gains tax revenue did increase after 2003, when the rate was cut again to 15 percent, but we would expect the revenue to rise from the low point of the recession, regardless of what changes were made to the tax code. More importantly, the revenue obviously has not reached the high level of the
When Gibson pressed Senator Obama a second time, insisting that cutting the capital gains tax rate would raise revenue, Obama replied, “Well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going.” Obama also brought up the issue of fairness in the tax code, and the fact that wealthy people with capital gains can pay less in taxes than middle-class Americans, which is an unacceptable feature of our system.
Senator Clinton, however, stated, “I wouldn't raise [the capital gains tax rate] above the 20 percent if I raised it at all. I would not raise it above what it was during the
A state-by-state report issued jointly by the Center on Budget and Policy Priorities and the Economic Policy Institute finds that income inequality has been increasing, and that taxes are an important tool for closing the widening gap between rich and poor. The report finds that the rate at which income inequality has been increasing has accelerated in recent years, and that the very richest Americans (those in the top 5% of the income distribution) are especially pulling away from the rest of the pack.
Federal taxes, though, are playing an important role in offsetting this trend. Using data from by the US Census, the report finds that before federal taxes are levied, the top fifth of income earners possess 9.3 times more income than the bottom fifth. After federal tax payments are taken into account, however, that number falls to 7.3 times more than the bottom fifth. So while most Americans may dread April 15, it turns out that day has some positive influences for those concerned with the continued concentration of income in the hands of the fortunate few. Unfortunately, this equalizing influence has become less pronounced in recent years, largely as a result of the benefits the rich have received from the Bush tax cuts. Reductions in federal taxes for the rich are therefore at least partially to blame for accelerated income inequality.
Like the Bush tax cuts, the report finds that changes in state tax systems over the past two decades have contributed to the accelerated rate of income inequality. In times of plenty, states were eager to cut progressive income taxes, but whenever budgets began to get tight, states turned primarily to regressive sales taxes and fees to fill the gap. The report warns that with states now “on the brink of another fiscal crisis”, this habit needs to be abandoned.
Increasing taxes, especially on the wealthy, can both slow the trend of increasing income inequality, and actually close budget gaps with less harm to state economies than what typically results from large spending cuts. The report advocates increasing income taxes, enacting or expanding low-income credits, and avoiding corporate and estate tax cuts as sensible tax policies for addressing growing inequalities. As noted in the report, and documented extensively by the Institute on Taxation and Economic Policy, state tax systems, unlike the federal tax system, are regressive and therefore actually widen the income gap. The increasing income inequality documented in this report provides yet another reason for state policymakers to take the regressivity of their tax systems very seriously.
Disturbingly, the Salazar amendment got 13 more votes this year than an identical amendment offered by Senator Ben Nelson (D-NE) last year. While the Salazar amendment failed this year, it failed by a vote of 38 to 62, whereas last year it failed 25-74.
Meanwhile, in the House of Representatives...
Under the Bush budget proposal, federal spending on veterans’ benefits would be 9 percent lower in 2012, as a percentage of the economy, than in 2008. Education and social services would be a fifth lower, natural resources and environmental programs over a fourth lower, transportation a third lower and community development over 62 percent lower. Medicare spending in 2012 would be 9 percent lower than in 2008, as a percentage of the cost of maintaining current services.
Meanwhile, the President proposes to make permanent his tax cuts, which expire at the end of 2010. In 2012, according to the administration’s own numbers, those tax cuts will cost $249 billion, which is just over the $229 billion he wants to cut from domestic programs in that year. So his promise to "balance" the budget in 2012 even while his tax cuts are extended clearly involves a trade of massive reductions in public services in return for tax cuts.
The reality is that the President's tax cuts are actually more expensive than this, and there are many more problems with his budget projections, as explained in the CTJ report.
mainstream economics is an attempt to cast a normal upswing in capital gains tax revenue, which always occurs in an economic cycle, as proof that cutting capital gains taxes actually increases revenues. As a new paper from CTJ explains, this revenue is well below the peak it reached during the Clinton era — when taxes were higher.The Journal points to data from the Congressional Budget Office (CBO) that documents this most recent increase in capital gains tax revenue.
But the CBO points out that capital gains "plunged between 2000 and 2002" because of the economic downturn occurring at the time. The implication is that we would expect capital gains to increase from that low point as the economy recovered even without a new capital gains tax break. In fact, it would be very unusual had they not increased from that very low point, regardless of whether the tax laws had changed.
Revenues from capital gains taxes, adjusted for inflation, are well below their level at the end of the Clinton administration, and capital gains tax revenues are not projected to come close to their Clinton-era levels at any time in the next decade.
Measured as a percentage of the economy (GDP), capital gains tax revenues have actually declined even more dramatically.