Sharing the Wealth?
Following last month’s release of the Treasury Green Book, the Tax Policy Center reworked its distributional analysis of the tax proposals in President Obama’s 2010 budget. We learned many new details about specific tax provisions, including the practical definition of who has enough income to face higher taxes. The bottom line? You have to have a lot of income to be in Obama’s crosshairs.
Compared with current law, almost everyone would get a tax cut in 2012 from the budget’s tax plan, as Howard Gleckman explained here on Tuesday. On average, households in each of the first four quintiles (or fifths) of the income distribution would see their after-tax income rise by between 4 and 5 percent; even those in the top quintile would get a 3-percent income bump. That’s not a lot of wealth sharing: a little shifts to lower-income households because Obama proposes to make refundable tax credits permanent, but the cuts run across the board.
Go a little higher up the income scale and you find that many people in the top quintile do well under the president’s plan. Those in the 80th to 95th percentiles would see their after-tax income rise more than 4 percent on average, and the 95th through 99th percentiles would get 3 percent more. Only when we reach the 1 percent with the highest incomes do the gains tail off and we have to climb to the rarified top one-tenth of one percent to see a small tax increase—yielding a 0.1 percent drop in after-tax income. That’s no surprise, of course. We heard repeatedly during the campaign that Obama would give tax cuts to 95 percent of working families.
I can already hear some of you objecting that I’ve biased my findings by measuring the budget proposals against current law, which includes a big tax increase after 2010 when most of the past decade’s tax cuts would sunset. Howard blogged on the choice of baseline earlier this week and subsequent comments churned through the alternatives. Next week, I’ll show you the graphs depicting how the tax changes stack up against the administration’s baseline—extend the Bush tax cuts, fix the estate tax at 2009 levels, and permanently patch the AMT (all for the tidy little cost of $3.2 trillion from 2009 through 2019). If you want to peek at the results sooner, you’ll find the relevant table on our website.
Suffice it to say for now that the tax proposals in President Obama’s 2010 budget are far from the massive redistribution of income we heard so much about during last year’s campaign.
We've covered the debate on which is the least misleading baseline for revenue purposes, and we agree that no reasonable baseline exists.
For the purpose of evaluating the distribution of income tax burden, however, the current law baseline is especially weak. Current policy (2009 tax rates) has a distribution of burden that the political process has vetted, for better or worse. Current law has the AMT returning to unindexed year 2000 levels. That would impose a massive tax increase on a wide swath of taxpayers from about $100k to about $500k, but it would not affect the truly rich (above $500k).
The distribution of tax liabilities changes markedly in the $100k to $500k range due to the AMT springback. Nobody of any ideological stripe believes that this shift in tax burden from higher and lower incomes into the $100k to $500k range represents an improvement, let alone an ideal against which the distributional effects of tax proposals should be measured.
Inclusion of the AMT springback makes the current law baseline unsuitable for distributional comparisons. The current policy baseline does not share this defect. Neither does Obama's baseline.
If the objective is to choose the baseline that makes Obama's proposals look favorable to the largest number of people, I recommend choosing unindexed 1982 tax law, with 50% rates on everything over $85k. Presto: Obama is cutting taxes for everyone!
Your penultimate paragraph has some merit. Using current law is meaningless, especially when it comes to the current law for the AMT.
I assume most of the members of the Tax Policy Center are liberal and wish for, but hide the true redistribution of wealth.