President Obama's plans to extend Bush-era tax cuts for those earning less than $250,000 will cost the federal government $243bn in lost revenue, according to an independent report.
The one-year extension Obama proposed on Monday is the least costly proposal so far in what looks set to be a fierce fight over taxation before November's election. Fellow Democrats, including House minority leader Nancy Pelosi, have suggested an extension for those earning less than $1m. That proposal would cost $271bn in lost tax revenue, according to independent research group Citizens For Tax Justice.
Republican contender Mitt Romney is in favour of an extension of all the Bush-era income tax cuts. That plan would reduce tax revenues by $311bn, according to the report. The figures do not include the additional interest on the national debt that would result from extending the tax cuts.
The tax cuts are set to expire on 31 December at the same time as draconian spending cuts are due to come into effect. Federal Reserve chairman Ben Bernanke and a raft of economists have warned that the combination of tax rises and spending cuts – the so-called "fiscal cliff" – could send the fragile recovery into reverse. The debate is likely to get more intense as the election nears.
Antony Davies, professor of economics at Duquesne University, said: "The deficit has two parents: tax cuts and spending." He said there were too few rich people to tax to make a noticeable difference to the deficit by increasing their tax burden, and that a short-term extension to those earning less than $250,000 would do little. "The real action here is with the middle class, who vastly outnumber the 1%," he said. "But the real problem here is not that the government is bringing in too little; it is spending too much."
Citizens for Tax Justice calculates that extending all the Bush-era tax cuts – which Romney supports – would cost the Treasury over $5tn in lost revenue over the next decade.
Mattea Kramer of the non-profit National Priorities Project said federal tax revenues had fallen 5% as a percentage of gross domestic product, from a high of 20% at the end of Bill Clinton's presidency to around 15% today – its lowest point in more than 50 years.
Kramer said the emphasis on spending cuts had disguised how much tax policy changes had cut into the government's coffers.
"There will be about $1tn lost this year in tax loopholes alone," she said. "It is simply wrong and dangerous to say it doesn't matter."
The Guardian: Obama's tax plans will cost US nearly $250bn in lost revenue, figures show