One Thing You Might Not Know About the Obama Tax Cuts
June 8th, 2009 . by economistmomAmong the many things you might not understand about the tax policies proposed in President Obama’s first budget–because the Obama Administration doesn’t like to talk about the biggest part of their budget, the extension of most of the 2001 and 2003 “Bush” tax cuts–here’s a biggie: “rich” people get the biggest tax cuts (yes, biggest, and yes, cuts) out of the President’s proposals.
Thank goodness for the Tax Policy Center and their nonpartisan analyses that always heed the “baselines matter” dictum. The TPC recently released a set of distributional tables on the Obama Administration’s fiscal year 2010 budget proposals. I like to look at the current-law baseline tables, because those show the effects of the legislation that would have to be signed by President Obama, were all his proposals to actually become reality. From Tables T09-0282 (distribution by income levels) and T09-0283 (distribution by percentiles), we learn the following about the Obama tax proposals in the Obama budget, some of which might be surprising to you:
- Compared with current law, all income groups get a net tax cut under the Obama tax proposals, except for the top 0.1% (households with annual income in excess of $2.7 million).
- In fact, even in relative terms (relative to their income levels), high-income households do well by the Obama tax cuts. The tables show that all income groups except those above $500K get above-average percentage increases in their after-tax income. (The average increase in after-tax income is 3.6 percent, and even the $200K-$500K group matches this average percentage increase.)
- The highest income groups (the richest households) are the ones that get the largest and above-average dollar value of tax cuts. While the average tax cut is about $2,000, most of the households above $250K enjoy tax cuts that are at least three times that size.
- Only the top 0.1% (>$2.7 million) would see a net tax increase and have more households faced with a tax increase than a tax decrease.
- The top 5% of households–those with incomes above $227,254–would still get a disproportionate share of the total dollar value of the tax cuts (13.3%).
- The largest (dollar-value of) tax cuts go to those in the 95th through 99th percentiles–households with annual incomes in the $227,254 to $601,435 range.
These facts are surprising–because we think President Obama wants to raise taxes on the rich and cut them only for those below that divined $250,000 threshold (commonly referred to as the “middle class”). But as I’ve explained before, it’s really hard to cut taxes on middle-income taxpayers through the income tax, without also cutting taxes (and even more so) on the rich. It’s even harder to steer the benefits of tax cuts (or any other forms of assistance) where you really want them when for some reason you feel committed to sticking with the old President’s tax policy agenda.
“These facts are surprising” because they are misleading. Specifically, very few readers here understand that “current law” for 2011 means Clinton tax rates PLUS a huge alternative minimum tax (AMT) hike.
If Clinton were still president, the AMT would surely be adjusted in 2011 and beyond. Yet current law includes the absurdity of eliminating the last 10 years of inflation adjustment of the AMT. Compared to that, almost anything looks like a tax cut. The current law baseline is therefore a popular tool to mislead readers into thinking that a big tax increase from 2009 rates is actually a tax cut.
Any analysis that uses current law as the baseline and does not tell you how the result would differ under a current policy baseline is heavily slanted and probably trying to mislead you. TPC presented both baselines, explained them, and let the reader decide which one to use. That’s the responsible way to do it.
If you think of your future tax burden in terms of the Clinton years plus a huge AMT hit, the current law baseline is for you. If you think of your future tax burden in terms of present tax rates, the current policy baseline is for you. If you think they are both baloney, just ignore all comparisons to any baseline and look at the raw budget numbers.