Going Over a Cliff Better Than Deal President Has Offered

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Institute for Policy Studies Blog

Going Over a Cliff Better Than Deal President Has Offered

Latest proposal by Obama would deepen inequality

The latest proposals by both President Barack Obama and House Speaker John Boehner would widen economic inequality in the United States. Here’s a quick rundown of some of the major offers on the table.

Top personal income tax rates

Rather than allowing Bush tax cuts on personal income over $250,000 to expire as scheduled at the end of the year, President Obama is now proposing to continue tax breaks for all income up to $400,000. This means just a fraction of the nation’s top 1 percent would be asked to pay more (the 1 percent threshold is $343,927). Shifting the goal posts would place more than $200 billion more into the pockets of those in the top 2 percent than would be the case if the $250,000 threshold were kept in place. This doesn’t just give a tax break to families with between $250,000 and $400,000 in income. Since we’re just talking about lifting the top marginal tax rate, those who earn more than $400,000 would also get a tax break of about $6,900 per year by not having to pay higher rates on their income in the $250,000-$400,000 range.

Neither the President nor Speaker Boehner has sought to end the carried interest exclusion which allows hedge fund managers to continue to pay taxes at the capital gains rate, not the higher wage income rate. The top hedge fund manager made $3.9 billion in 2011, meaning that the carried interest exclusion saved him $780 million last year alone.

Estate Tax

President Obama is proposing returning the U.S. estate tax to its tepid 2009 level: a 35 percent tax on couple’s estates over $7 million. At that level, only people in the top 0.25 percent would be affected. A more equitable approach would be a proposal by Senator Bernie Sanders (I-VT) that would establish the same $7 million per couple exemption, but impose a graduated tax, starting at 45 percent for amounts between $7 million and $10 million; 50 percent between $10 million and $50 million; and 55 percent on amounts above $50 million. A ten percent “billionaire’s surtax” would be imposed on estates worth more than $1 billion for couples or $500 million for individuals.

Earned Benefit Programs

Even though Social Security, by law, is not funded out of the general fund, both President Obama and Speaker Boehner continue to act as if Social Security is somehow a part of the federal deficit. The President’s latest proposal, one supported by many House Democrats, would result in immediate and on-going reductions in Social Security benefits, through use of a new formula to calculate annual cost-of-living benefits. The so-called “chained CPI,” allegedly a more accurate measure of inflation for the society at large, would reduce Social Security cost of living allowance (COLA) by 0.3 percent per year.

This doesn’t sound like much, but over 20 years, that’s a cut of 6 percent (or about $1,000 a year) over what benefits would have otherwise been. Moreover, economist Dean Baker points out that the new measure poorly reflects the actual consumption patterns of elderly Americans. Since health care inflation has historically risen much more rapidly than other consumer items, retirees face costs that are already 0.2 to 0.3 percent higher than the current COLA formula reflects. Given that the median income of Americans over 65 is less than $20,000, and that 45 percent of senior citizens rely on Social Security for more than 90 percent of their income, the proposed change represents increased hardship for those who can least afford it.

Neither side is taking up the issue of the $100 billion lost each year as the result of tax haven abuse. This $1 trillion over the 10-year budget window nearly is equal to the total proposed cuts to health, social security, and military spending under the draft proposals.

Capital Gains and Dividends

President Obama has abandoned his proposal to tax dividends as ordinary income and instead would allow all income from wealth – capital gains and dividends – to be permanently taxed at 20 percent. That’s only about half the top marginal tax rate for income from work and reflects an additional $100 billion in tax savings that would go disproportionately to upper-income Americans. This would assure that America’s wealthiest citizens, including folks like Warren Buffett, will continue to pay lower tax rates than many middle class families.

Corporate Taxes

President Obama is proposing a “fast track” process for achieving both corporate and individual tax reform. This suggests that members of Congress will have only limited time to debate and no chance to amend the tax legislation. Pushing corporate tax reform through as part of a “fast track” package is particularly problematic, given the high-profile role of corporate CEOs in backing tax hikes for wealthy taxpayers in exchange for sharp cuts in corporate tax rates and a permanent offshore tax holiday on foreign profits.

Neither side is taking up the issue of the $100 billion lost each year as the result of tax haven abuse. This $1 trillion over the 10-year budget window nearly is equal to the total proposed cuts to health, social security, and military spending under the draft proposals.

Not only are both sides silent on offshore tax abuse, they stand ready to make permanent two pernicious loopholes in the corporate tax extenders bill. One, called the active financing exception is the principal reason General Electric pays little to no taxes each year. The other, called the “Controlled Foreign Corporation Look-Through” is the reason why companies like Apple, Microsoft and Google can shift their U.S. profits to a foreign tax haven with a simple computer keystroke. Both of these egregious abuses have been targeted by progressive fair tax advocates.

While corporate profits are at a 50-year high, corporate tax collections as a share of the economy are at 50-year lows. If corporate lobbyists get their way, corporate taxes will be going lower still.

Giving rich individuals and prosperous corporations more tax cuts, while asking seniors to give up Social Security benefits is a bad deal. The early reaction by many progressive organizations is that it would be better to go over the cliff than accept the emerging bargain the President has offered.

Scott Klinger

Scott Klinger is Director of Revenue and Spending Policies at the Center for Effective Government. Prior to joining Center for Effective Government, Scott was the Tax Policy Director at the American Sustainable Business Council and an Associate Fellow at the Institute for Policy Studies, where he wrote about issues of tax and economic inequality.

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