The Obama Tax Cuts: More Generous Than Ever
Everybody gets a tax cut!
To look at TPC’s latest estimates of the tax provisions of President Obama’s 2010 budget, you’d think there was no deficit of $1.84 trillion, or that the White House has no need to pay for an ambitious health reform plan. Or more education spending. Or more infrastructure construction.
According to TPC’s new analysis of the tax proposals in the Treasury Department’s Green Book (which turn out to be even more generous that what was disclosed in his earlier budget summary), Obama would give 90 percent of all families and individuals a tax cut. Only about 600,000 taxpayers—or about 0.4 percent–would see their taxes go up under the Obama plan.
Given the nation’s fiscal mess, this appears to be fiscal policy designed by Lewis Carroll, rather than Larry Summers or Tim Geithner. You may remember the White Queen, who told Alice, “Why, sometimes I've believed as many as six impossible things before breakfast.”
How generous is the Obama plan? On average, taxpayers making $500,000 or less would enjoy a bigger increase in their incomes under his budget than they did under President Bush’s 2001 and 2003 tax cuts. Even those making between $200,000 and $500,000 would get a bigger boost in after-tax incomes under the Obama plan than they did under Bush.
In fact, while it has become shorthand to say that Obama would make only the rich pay higher taxes, that doesn’t quite tell the story. More than three-quarters of those making between $500,000 and $1 million would get a tax cut. Almost 60 percent of those making more than $1 million a year would get a tax cut. Those lucky duckies making between half-a-million and $1 million would get an average tax cut more than $6,000 and enjoy an increase in after-tax income of more than 1 percent. And the incomes of the luckiest duckies of all—those making more than $1 million—would increase by $4,600. Is this a great country or what?
Thanks in part to Obama’s Making Work Pay credit, a sweeter Earned Income Credit, and more generous refundability provisions of the child credit, low-income families would do very well. Those making less than $50,000 per year would see their incomes rise by an average of 4 percent or more. Those making between $100,000 and $200,000 would also come out nicely, with their after-tax incomes rising an average of 4.5 percent, or about $4,800.
Two important technical points: TPC estimated the effects of the tax cuts for 2012, when most provisions are fully phased in. Also, the tax changes are relative to current law. Obama, of course, prefers to measure them against current policy—assuming, for example, that the Bush tax cuts are permanent, the estate tax is repealed, and the AMT is patched. If TPC used that measure, higher income people would be paying higher taxes under this plan. Not to be old-fashioned, but to me the law is what it is, and that’s what we should be using as a basis of comparison.
The irony here is the Republicans continue to bash Obama for being a tax-and-spender. That he is a spender is beyond dispute (and maybe not all bad, at least in the recession-ravaged short-run). But a big taxer? Hardly.
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Len, your facts are correct, as always. But current policy is still the common-sense baseline, for taxes as it is for spending. The fact that the common-sense baseline is wildly out of balance is a different issue. Two wrongs don't make a right.
As the reply on EconomistMom said (and thanks for that link, by the way): “it will be played up as the largest tax increase in American history. The fact that it may simply be undoing an ill-advised tax cut will make no difference.”
This is similar to the game the parties play by arguing whether spending is being cut or not when services are reduced but the money spent nevertheless increases.
My point is not necessarily that current policy should be the baseline for taxes or for spending, only that in public's mind current policy is the baseline.
Even if the public were aware that budget projections have been based on fictitious future revenues, I don't believe that they would support expiration of the Bush tax cuts. People prefer stability in tax code and in government policies in general. They fear change except at those rare times when they fear an extrapolation of current trends even more. A tax break in the hand beats two promised tax breaks in the bush.
AMTbuff, I disagree. Under current law, the tax cuts expire, which means it takes an act of Congress to extend them. They expire, in part, because back in 2001 many legislators thought they were unaffordable, and we were looking at massive projected surpluses then. (I know, it was a parliamentary maneuver, but it wouldn't have worked if a significant minority in the Senate weren't concerned about cost.) Now we're looking a huge and growing deficits. The presumption really should be that all of the tax cuts expire. Then we can decide which ones, if any, are worth borrowing money to finance. In a much more rational world, I think the answer would be, not many.
There's also a question, which EconomistMom articulated well: Why should Obama be spending scarce budgetary resources extending Bush's tax cuts?
Howard, using current law as the baseline is misleading. First, neither the public nor any experts expect all tax rates to spring back to pre-2001 levels. For a baseline to be meaningful, it must first be credible. Current law is not.
Second, if you use current law as the baseline, you give credit (or blame) to both Bush and Obama for the very same tax cuts, namely everything below the top two brackets. Your article reads as if the tax cuts are cumulative, but they are not. It's one tax cut: first a temporary version then a decision to make it permanent.
I guarantee that taxpayers do not regard continuation of current tax rates as a tax cut. Any politician attempting to persuade the public that this continuation is actually a tax cut would be ridiculed. Obama's baseline is the correct one, no matter how enticing the phantom revenue in the current law baseline appears.
Your argument reminds me of the writings of tax protesters who claim the Income Tax is invalid. They come up with all sorts of legalistic reasons, but they never confront the core issue: All that legalese will never be accepted by the decision makers. Here the voters are the decision makers, and they don't know or care that current law calls for a huge tax increase in 2011. The public's baseline is Obama's baseline: current tax rates.