In a prior blog I explained how raising the tax rate on the high earners would not increase taxation revenue by anywhere near $1.6 trillion. Although that is true, I wasn’t aware of the full dimensions of the Obama tax plan. Donald Marron, the head of the Tax Policy Center has laid out the specifics of the Obama plan, item-by-item.
* Increasing the 33 and 35 percent brackets would raise $442 billion over ten years.
* Tax deductions would be trimmed. They would be phased out for the very rich and would provide no more than a 28 percent writeoff for others in the high tax brackets. This would be a revenue gain of $707 billion over ten years.
* Tax rates on dividends from stocks would rise from 15 percent up to the highest tax rate on wages, raising aother $206 billion in ten-year revenue.
* The capital gains tax rate would go from 15 to 20 percent: a ten-year gain of $36 billion.
* The personal exemption for the wealthiest taxpayers would be phased out, for a ten-year gain of $42 billion.
* The estate tax would return to 2009 levels. In 2009, the tax exemption was $3.5 million and the tax rate was 45 percent. The ten-year revenue gain would be $119 billion.
The total revenue gain from this package of taxes would be $1.552 trillion over ten years, according to the head of the Tax Policy Center.
The impact on the highest categories of taxpayers would be as follows: the top one percent, with incomes beginning at $597,000, would pay an average of $72,000 in higher taxes, representing a 5.1 percent decline in their after-tax income. The wealthiest 0.1 percent (included in the one percent), with a minimum income of $2.9 million, would pay an additional $403,000, a 6.6 percent drop in their after-tax income. The richest 95th to 99th percentile of taxpayers (an income threshold of $252,000) would pay an average of $5,765 more in taxes.
These increases would restore the tax burden on the rich to roughly where it was before the Bush tax cuts.
The Tax Policy Center calculates that limiting taxpayers’ itemized deduction to $17,000 would raise $1.7 trillion over ten years. I believe the economist Robert J. Samuelson has it wrong when he uses the word “limiting” in referring to itemized deductions. What I previously read and wrote about was that the Tax Policy Center had calculated that “eliminating” all tax preferences for the wealthy — those earning over Obama’s $200,000 and $250,000 thresholds — would increase revenue by $1.7 trillion over ten years.
The projected revenue gain of the Obama tax plan would be reduced by his proposal to reduce the corporate rate and his desire to continue the employee 2 percent FICA tax rate cut for another year. This will reduce the Social Security trust fund revenue by another $112 billion (the Obama administration puts the loss at $115 billion). The FICA tax cut hastens the day when Social Security can’t pay full benefits and it emboldens those who want to kill Social Security by decreasing its tax revenue.
The crucial flaw in the Obama taxation approach is that it ignores the enormous concentration of wealth and income in the top 20 pecent of U.S. households, accelerating as one lowers the tax rate percentages. This concentration of wealth and income was triggered initially and primarily by the Reagan tax cuts in his first term and then accelerated even more by the Bush tax cuts.
The bottom line is that both the rich and the middle-class are under-taxed, illustrated most centrally by the common wisdom that the tax burden is the lightest it has been since the Truman administration, during which the Korean War occurred. The IRS has also concluded that 47 percent of U.S. households paid no federal income tax in 2008; also, a family of four in the exact center of the income tax structure paid only 4.7 percent of its income in federal income tax.
Generally overlooked — in part because a cabal of Republicans in the U.S. Senate suppressed public release of a study by the Congressional Research Service (CRS) of taxation over a 65-year period. The CRS found that “there is little evidence over the past 65 years, that the tax cuts for the highest earners are associated with savings, investment and productivity growth.” On the contrary, the CRS study found that higher tax rates for the wealthy was satistically associated with higher levels of growth. The researchers were perplexed by this relationship between high tax rates and economic growth. I see a logical relationship. Those in the high tax brackets have an incentive to lower their taxable income. They can do this by hiring more workers or adding to their business facilities. There is little incentive to do so when the top rate is 35 to 39 percent and those in the top brackets pay taxes in a range of 18 to 22 percent of their taxable income.
President Obama is in the same argumentative position as he was two years ago, when he wanted to cut the FICA tax rate and extend unemployment benefits. In order to get these tax and spending concessions he may need to agree to another extention of the Bush tax cuts, when faced with a recalcitrant GOP majority in the U.S. House.