Wednesday, August 25, 2010

Letting the Tax Cuts Expire – Doing the Math

There’s a great paper put out by the Tax Policy Center, which puts into greater detail what the effect of the Obama administration’s proposed tax plan would actually mean at different income levels. The paper determines:

The impact of the Obama proposal is virtually identical to that of extending all of the cuts for the vast majority of tax payers. Sizeable differences don’t emerge until you hit the top 1 percent of taxpayers – those households making at least $600,000.

This means that even for the administrations own rhetoric about households making $250,000 or more per year is a conservative estimate on how big a group will be impacted. The paper outlines that in the 90th to 95th percentile the real difference between the Obama proposal and the full extension of tax cuts is $2. That’s not a typo. Houses making on average $196,549 will receive a tax cut of $5,508 under the Obama plan, versus $5,510 under a full extension.

Take this in contrast to the 99.9th percentile of tax payers with an average income of $8,367,274, under Obama’s plan they would lose $310,140 in tax cuts, what amounts to 3.7% of the average income for those in the 99.9th percentile. It’s also worth noting that NO income level will see their tax liability increase to pre-2001 levels. Even at the highest percentile of earners, they will have tax cuts 1.1% great then they would if all the tax cuts were allowed to expire.

So why the uproar? It’s the same old song and dance I’m afraid. The Obama proposal will hit the folks in the top 1% of income earners, those folks making more then $1,000,000 per year, but for the other 99% the effect is shown to be minimal if nonexistent. We have long-run deficit problems in this country and the Tax Policy paper notes that this proposal is not a silver bullet, but it’s a modest first step, and a step worth making.

Alan Greenspan recently said that tax cuts don’t pay for themselves. But Majority Leader Mitch McConnell wouldn’t respond to a direct question if indeed the full extension of these tax cuts would pay for themselves. He avoided the question four times on how you pay for a full extension of the tax cuts. It’s worth noting that that Congressional Budget Office has determined a full extension of the tax cuts will add $3.7 trillion dollars to the deficit over the next ten years. You can talk about cutting spending all you want (and McConnell did) but the only actual proposal the Republicans have put forth is Rep. Paul Ryan’s “Roadmap” plan. This plan, by the way, was scored by the CBO with unrealistic assumptions and it was only because of those unrealistic assumptions (provided by Rep. Ryan’s staff) that the “Roadmap” did anything to reduce the deficit.

The Obama proposal is a limited first step in a long road to long-run fiscal solvency. To this point, we have had to ignore the short-run deficit and I would dare say that in the next four to six quarters we could continue to ignore the deficit, but letting the majority of tax cuts expire for the top 5% of earners in this country seems like a sensible step to move us down the road.

1 comment:

Colin said...

The Obama proposal is a limited first step in a long road to long-run fiscal solvency.

"Limited" is putting things charitably. The difference between the full tax cut extension and limited Obama extension is $67 billion per year. This is in the context of a 2011 budget that was proposed at $3.8 trillion and a forecasted 2010 budget deficit of $1.17 trillion.

So where does the rest of the deficit reduction come from? Where is the net spending cut Obama talked about on the campaign trail?

It's also curious to me that after all of the Democratic teeth-gnashing about the Bush tax cuts that President Obama has stepped up to the plate with a tax proposal whose fiscal impact the TPC notes is "virtually identical" to the full tax cut extension. What gives?

Lastly, you may be unaware of the brouhaha that Krugman touched off with his criticism of Paul Ryan. While Krugman accuses Ryan of engaging in flim-flammery, it seems Krugman himself is either dishonest or ignorant in his accusations. Read this, this, and this.

That's not to say, however, that your overall point about Republicans being all hat and no cattle on cutting government spending is incorrect. Which, again, is why caricatures of Republicans as a horde of barbarians bent on the demolition of the federal government are so utterly laughable. If only...