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Tuesday, July 17, 2012

"Tax hike" misleading, overlooks call for big tax cut. What about tax policy?

Some recent news stories and blogs refer to President Obama's call to only extend tax cuts for the 97% of individuals with income under $200,000 ($250,000 if married filing jointly), as a "tax hike" for the 3% with incomes above that level. (Just do a Google search using: "Obama" "tax hike" "2012," and you'll find various places using that term including some think tanks.)  

This overlooks the history of how we got here.  Back in 2001 and 2003, various tax cuts were enacted including rate reductions, a higher child credit and a reduced rate on qualified dividends (15%). These cuts were enacted to expire at the end of 2010. In December 2010, Congress and President Obama extended them all for 2 more years. So, at the end of 2012, the cuts automatically expire. To keep any of them, legislation must be enacted. So, why aren't calls for renewing lower tax rates and higher tax breaks for 97% of individuals a call for a "tax cut"?  Legislation enacted to accomplish what President Obama proposes will be a revenue losing bill.

How much revenue?  The Administrations FY 2013 Greenbook provides some insights, but not obvious ones.  You have to dig into the footnotes and do some calculations. The revenue estimates in the FY2013 Greenbook assume a baseline where the 2001 and 2003 tax cuts are permanently extended for all individuals. This then allows for showing a revenue increase if these tax cuts are not extended for upper-income individuals. Table 2 of the FY2013 Greenbook (page 206) shows that the cost of extending the tax cuts for all individuals for 2013 through 2022 (ten years) is $2.2 trillion. The Joint Committee on Taxation has also estimated the budget effects of the FY2013 revenue provisions from President Obama. The dollar amounts are close to, but not exactly equal to those included in the Greenbook. See Joint Committee on Taxation, Estimated Budget Effects Of The Revenue Provisions Contained In the President’s Fiscal Year 2013 Budget Proposal, JCX-27-12 (3/14/12). 

So, extending tax cuts for all individuals costs $2.2 trillion over 10 years. How much is that reduced by not extending them for the top 3%? The Greenbook also has that. Here is a summary:

10 year estimate
(in millions)
Reinstate the limitation on itemized deductions for upper-income taxpayers

Reinstate the personal exemption phase-out for upper-income taxpayers
Reinstate the 36% and 39.6% tax rates for upper-income taxpayers
Tax qualified dividends as ordinary income for upper-income taxpayers
Tax net long-term capital gains at a 20% rate for upper-income taxpayers

So, if the cost to extend tax cuts for everyone is $2.2 trillion and we subtract $849 billion for not renewing them for the upper 3%, it looks like a proposal for a $1.3 trillion tax cut, not a tax hike.

Now, President Obama does have some true tax hike proposals in his FY2013 Greenbook, including reducing the value of certain deductions and exclusions for upper income individuals. He also proposes some additional tax cuts, but his largest tax cut stems from the proposal to extend the tax cuts for 97% of individuals.

Discussions of a "tax hike" means that the BIG question of how a $1.3 trillion tax cut over 10 years will be paid for is overlooked.  This all also distracts from discussions of what is the appropriate tax policy (design) for our income tax.  What about having a discussion that addresses these questions:
  1. What is the appropriate income tax rate structure for a progressive income based on today's income quintiles?
  2. Should capital gains and dividends be taxed at the same rate as other income?
  3. How does the corporate tax rate tie to answering question 2?
  4. What is the appropriate income tax base?  Every tax preference (special deduction and exclusion) should be evaluated. If it serves no purpose, end it or phase it out. This will help pay for lower rates, and make the tax system more equitable and simple.
  5. What tax credits, if any, should be included in the income tax?
  6. How does data on income distribution and the poverty level affect the tax rate, base and credit questions?
That's just a few tax policy questions we need to answer.  Unfortunately, the focus on "tax hikes" and other misleading statements (such as the effect on "small business" of not extending the tax cuts for the top 3%), distract from the facts and from having a much needed tax policy discussion.

What do you think?

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