Author: tarek

When Kansas Governor Sam Brownback signed into law a $4.5 billion (over six years) tax cut package ealier this year, he told Kansans, “I think we are going to be in good shape.” He promised tens of thousands of new jobs and insisted “[w]e will meet the needs of our schools … Our roads will be built.”  But after claiming as recently as July that the state was in “an excellent fiscal position,” the Governor is conceding that even across-the-board spending cuts may not be enough to make up for the massive revenue losses (projected to be $2.5 billion over six years) from these tax cuts – that will go disproportionately to the state’s most affluent.  

The Governor received national praise from conservative quarters for the tax package he signed into law in May. The plan included income tax rate reductions, elimination of several low-income credits, completely eliminating taxes on some business income, and was supposed to put the state “on a road to faster growth.” But the reality is that tax cuts cost money and Governor Brownback is now indicating he is open to a sales tax hike to pay for them.

The current 6.3 percent sales tax (a temporary revenue fix from 2010) is scheduled to drop back to 5.7 percent in July.  The Governor’s own original tax package, proposed in January, would have permanently held that sales tax rate steady, and thus cost much less than the tax legislation he eventually signed.  His plan was also seriously flawed: the bottom 80 percent of Kansas taxpayers would have seen a tax hike under the Governor’s plan because it reduced reliance on the state’s income tax in exchange for a higher sales tax. But once again, Governor Brownback finds himself relying on a higher sales tax (even though he ran against it in his 2010 campaign) because of income tax cuts that gut his state’s budget.  He rationalizes the need for a sales tax increase by saying, “There’s going to be a two-year dip. That’s the nature of these, when you cut taxes. If you cut them right, you get growth on the other side, but there’s a dip first.”

Unlike a progressive income tax, sales taxes (PDF) require low and middle income taxpayers to pay more of their income in taxes than wealthier taxpayers. This way of handling what Brownback euphemistically calls a “dip” that results from radical tax cuts actually falls hardest on the Kansas families who can least afford it.

The first and only Vice Presidential Debate of the election season between Vice President Joe Biden and Wisconsin Congressman Paul Ryan featured a spirited discussion over their competing visions for tax policy. While watching, we began to genuinely wonder if Biden had spent time reading Citizens for Tax Justice (CTJ) materials considering that time and again he made precisely the points CTJ has been making for years. Ryan, on the other hand, repeatedly misrepresented the tax system and the two tickets’ tax plans.

Below we breakdown the most important tax policy moments in the debate:

1. Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts

While the presidential candidates largely ignored the Bush tax cuts in their debate last week, Biden put them front and center during the VP debate when he pointed out that Romney and Ryan are proposing the “the continuation of a tax cut that will give an additional $500 billion in tax cuts to 120,000 families” over the next ten years, compared to the Obama Administration plan for the Bush tax cuts.

Biden’s formulation here is a little confusing but not incorrect. Of course, President Obama proposes to allow the Bush income tax cuts to expire for income in excess of $250,000 for couples and in excess of $200,000 for singles, and only 2 percent of taxpayers would lose any portion of their Bush income tax cuts under this approach. The administration has stated that this would cost $849 billion less, over ten years, than extending the Bush income tax cuts for all income levels, while our own estimate is that it would cost $887 billion less over ten years. Pretty close.

Biden is focusing specifically on the part of this figure that would benefit the richest 120,000 families, apparently based on figures from the Tax Policy Center. Our own calculations essentially back up Biden’s point. We estimate that the richest taxpayers with incomes exceeding $2 million in 2013 (the richest 135,000 families in 2013) would receive about 57 percent of the income tax cuts that would otherwise expire under Obama’s approach, which comes out to $507 billion over ten years.

2. Ryan Promises the Mathematically Impossible

In defending Romney’s tax plan, Ryan reiterated their ticket’s commitment to “lower tax rates across the board” and to “close loopholes,” while simultaneously sticking to the “bottom lines” of not raising the deficit, not increasing taxes on the middle class or lowering the share of income that is borne by high-income earners. But Ryan is defending a plan that CTJ has found is mathematically impossible. Even if Romney and Ryan eliminated all the tax expenditures for wealthy taxpayers that they have put on the table, our analysis has found that their across-the-board tax cuts would still require them to give an average tax break of $250,000 to individuals making over $1 million, which would violate their pledge not to lower the share of taxes borne by high-income earners.

Ryan said during the debate that there are six studies showing that their plan is possible, but Biden correctly pointed out that even the studies Ryan cites conclude that the plan would require increasing taxes on taxpayers who do not have particularly high incomes.

3. Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table

One of the major reasons that the Romney campaign’s tax plan would be incapable of eliminating enough tax expenditures to add up is that Romney has specifically said that he would keep the tax breaks for capital gains and stock dividends. During the debate, Biden noted that this shows the lack of seriousness in Romney’s loophole-targeting approach because Romney has exempted the “biggest loophole” of all – the “capital gains loophole.”  As CTJ pointed out in a recent report, ending the capital gains tax preference would tremendously improve fairness, raise revenue, and simplify the tax code in one fell swoop. 

4. Ryan and Biden Dispute the Definition of Small Businesses

Repeating Romney’s line on small businesses from the first presidential debate, Ryan claimed that Obama is going to raise taxes on small businesses and kill 710,000 jobs by doing so. The reality, however, is that only the 3 to 5 percent richest business owners (individuals who could hardly be called “small business” owners) would lose any of their tax breaks, and the job loss claims are complete malarkey.

5. Biden Takes on Romney and Ryan’s Commitment to Grover Norquist

During the first presidential debate, Romney reiterated his pledge to not raise a single penny in revenue, even if the revenue was raised as part of a deal that included $10 in spending cuts for every $1 in revenue increases. Biden took issue with this commitment saying that “instead of signing pledges to Grover Norquist not to ask the wealthiest among us to contribute to bring back the middle class, they should be signing a pledge saying to the middle class we’re going to level the playing field.”

Biden is absolutely right that we need to reject the extreme anti-tax approach taken by individuals like Grover Norquist and instead embrace a balanced approach to deficit reduction. The question for Romney is when he will recognize that a balanced approach is not only what the American people want, but also what business experts support as well.

6. Ryan Misrepresents History of 1986 Tax Reform

Responding to the question of what specific loopholes he and Romney are proposing to close, Ryan attempted to dodge the question by arguing that they should not lay out specific loopholes they want to close because doing so would prevent them from following the model that allowed Ronald Reagan and Tip O’Neill to produce the 1986 tax reform. The reality, however, as recounted by CTJ Director Bob McIntyre – whose work was integral to the passage of the 1986 reform – is that Reagan’s Treasury Department released a detailed tax reform plan explicitly laying out exactly which tax expenditures the Administration would like to see closed. In other words, the 1986 tax reform experience actually proves the opposite of what Ryan is saying about vagueness being some kind of asset.

7. Biden Revives Romney’s 47% Remark

Continuing his efforts to upend tax myths during the debate, Biden took issue with Romney’s earlier statement that 47 percent of Americans aren’t paying their fair share, and he noted that many middle income people actually “pay more effective tax than Governor Romney in his federal income tax.” Biden was right to push back against the notion that any Americans are not contributing their fair share since, on average, any American’s share of total taxes is already roughly equal to their share of total income. In addition, CTJ has found that individuals making around $60,000 do in fact pay an effective federal tax rate of 21.3% on average, which is a lot compared to Romney’s tax rate of 14% in 2011.

8. Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes

During the debate, Ryan asserted, “Of the 21 tax increases in Obamacare, 12 of them hit the middle class.” The reality, according to a CTJ analysis, is that 95 percent of the tax increases included in the healthcare reform legislation would be borne by either companies or households making over $250,000. Adding to this, Ryan’s specific point about the 12 tax provisions is mostly false because 4 of the 12 provisions are not really taxes at all.

9. Biden Stumbles on the Primary Cause of Great Recession

The only significant tax policy stumble for Biden came when he argued that Ryan helped create the Great Recession by “voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy.” The problem of course is that the Great Recession was due primarily to a financial crisis, not some sudden crisis in government spending and deficits.

While extraordinary increases in deficit spending and tax cuts for the rich during President George W. Bush’s presidency, (which Ryan did vote for), did not cause the recession, they certainly caused an explosion in the national debt. In fact, if continued, the Bush tax cuts and the cost of the wars will account for nearly half of the public debt by 2019.

10. Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich

In an attempt to discredit the idea that allowing the Bush tax cuts to expire for the wealthiest Americans will help fix the deficit, Ryan argued that “if you taxed every person and successful business making over $250,000 at 100 percent, it would only run the government for 98 days.” To start, the entire premise of this argument is bogus because the Obama administration is not proposing a revenue-only approach to deficit reduction; in fact it has already signed into law over $2 trillion in spending cuts. In addition, Ryan ironically failed to discern, even by his own calculations, that 98 days worth of government spending would be more than enough to close the projected budget deficits and would be more than enough to pay down the national debt in the coming years.

Bad news out of Louisiana, where the chairman of a commission reviewing the state’s tax breaks says they will likely fail to make recommendations for which breaks should be reformed or eliminated.  Turns out no one has been collecting useful data on their cost and performance, and no methodology for comparing tax breaks against each other is available. Both of these shortcomings could have been prevented had the state followed ITEP’s five recommendations for tax expenditure reform .

Policy Matters Ohio has a new report reinforcing the idea that gambling revenue is not a panacea (PDF) for ailing state and local budgets.  The report’s major finding?  “New casino tax revenue will provide less than a quarter of the nearly $1 billion in annual losses local governments will see because of cuts in state aid… Ohio needs to boost its investment in schools, local governments and human services with additional revenue from those who can afford to pay. Revenue from gambling does not suffice.”

Here’s a great blog post from our friends at the Oklahoma Policy Institute (OKPolicy) about the diastrous tax plan that Kansas Governor Sam Brownback signed last May, and why Oklahoma policymakers shouldn’t pursue the same sorts of costly and regressive tax cuts enacted by their neighbors in the Sunflower State.  OKPolicy concludes, “Oklahoma does not need to be the next laboratory for Kansas’ radical tax experiment.”

Picking up on Mitt Romney’s infamous assertion about the 47 percent, this post from the Wisconsin Budget Project answers the question “Who’s in the “47%” in Wisconsin?” They use Census data and figures from the Center on Budget and Policy Priorities (CBPP) to figure out who really are the “moochers.” The Budget Project argues that there are “numerous Wisconsin workers who would probably love to earn enough to owe income taxes,” so the smart move would be implementing policy options to improve their compensation and help them join the tax -paying ranks.

In November, California voters will decide on two not-so-different revenue raising ballot measures.  Proposition 30, backed by Governor Jerry Brown, temporarily raises income taxes on the state’s wealthiest taxpayers and increases the sales tax by a quarter cent.  The rival measure, Proposition 38, temporarily raises personal income tax rates on all taxable income upwards of about $50,000.  Californians can technically vote for both measures on the ballot, but even if both “win” only the one with the most votes will become law, so voters must choose carefully.

Both measures would raise billions of dollars in much needed revenue for education spending, primarily from the wealthiest Californians. An Institute on Taxation and Economic Policy (ITEP) analysis published by the California Budget Project found that the wealthiest one percent of Californians, with incomes averaging $532,000, would pay for close to 80 percent of the tax increase under Proposition 30 and around 45 percent under Proposition 38.  

As ITEP’s Meg Wiehe explained it to the San Francisco Chronicle recently, the big question for voters is not so much a tax fairness one but more about “’where do I want the money to go?  They both have very different end goals with the amount of money raised.”

California is one of a dozen or so states handicapped by a law that says a supermajority of lawmakers must approve of any tax changes. (Just as invoking the filibuster rule requires 60 votes to get anything done in the U.S. Senate, and we’ve all seen how well that works!) Facing a multi-billion dollar budget gap, Governor Jerry Brown first tried to raise revenues via the normal legislative process, but was stopped short of the two-thirds support needed. So he turned to the ballot process – and the people – to get the revenue increase the state needed.  The revenue from Proposition 30 would go into a new Education Protection Account in the state’s General Fund, increasing funding for K-12 and community colleges and freeing up other general fund dollars to address other spending priorities.  Importantly, Brown also built $6 billion of trigger cuts into his FY12-13 budget if Proposition 30 does not pass in November.  In other words, the governor’s budget was built on the premise that the revenue from his measure would be available and if it loses, naturally spending would have to be reduced by that amount mid-year.

All revenues from Proposition 38 would go directly to K-12 schools and only K-12 schools. None of the revenue could be spent on any other budget priorities since it can only supplement rather than supplant current spending on K-12 education; however, about a third of the funds can be used to reduce state debt. Even with the billions of dollars in new revenue Proposition 38 would bring to the Golden State, if it gets more votes than Proposition 30, $6 billion in spending cuts would automatically go into effect as per the Governor’s budget, forcing reductions in vital programs such as community colleges, universities, corrections and others. 

In large part due to this one striking difference between the two measures – that Proposition 30 would prevent devastating spending cuts and Proposition 38 would not – both the LA Times and the San Francisco Chronicle have endorsed Proposition 30.

It’s worth mentioning that some opponents of both measures have hauled out the millionaire migration canard, suggesting California’s wealthiest residents will flee if asked to pay higher taxes. But as ITEP’s Carl Davis explained to the Silicon Valley Mercury News, “There just isn’t any persuasive evidence out there to make you think that there would be a significant number of Californians moving because of this tax change.” In fact, the newspaper’s own analysis found that over the past 15 years, the share of the country’s ultra rich living in California has gone unchanged, even with a series of temporary tax increases and a new millionaire’s tax in 2004.

For more detail on who would pay for each of the ballot initiatives, ITEP’s analysis can be found in three California Budget Project reports: What Would Proposition 30 Mean for California?, What Would Proposition 38 Mean for California?, and How do Propositions 30 and 38 Compare?

by CTJ Director, Robert McIntyre

In a speech at the National Press Club on October 9, Senator Chuck Schumer (D-NY) joined with President Obama in calling for revenue-raising tax reform, by closing loopholes and reversing the Bush tax cuts for the wealthy, to help address our nation’s long-term deficit problem.

“We must reduce the deficit, which is strangling our economic growth,” Schumer said. “And we must seek to control the rise in income inequality, which is hollowing out the middle class.”

Schumer added: “It would be a huge mistake to take the dollars we gain from closing loopholes and put them into reducing rates for the highest income brackets, rather than into reducing the deficit.”

Specifically, Sen. Schumer called for restoring the top personal income tax rate on top earners to the Clinton-era 39.6 percent and “reducing but not eliminating” the current huge gap between the extremely low tax rates on high-income investors and the much higher tax rates on working people.

So far pretty doggone good. But then Sen. Schumer stumbles. Here’s what he says about corporate (and other business) taxes:

“Some on the left have suggested corporate tax reform could be a source for new revenue, but I disagree. To preserve our international competitiveness, it is imperative that we seek to reduce the corporate tax rate from 35 percent and do it on a revenue-neutral basis.”

Oops! Despite the fact that U.S. corporate income taxes are almost the lowest in the developed world (PDF) as a share of the economy, Schumer seems to think that the amount we now collect in corporate income taxes is just about perfect. That’s simply ridiculous.

For one thing, the kind of “tax reform” that big corporations and their allies in Congress are promoting would be perverse. Their central goal is to eliminate U.S. taxes on corporations’ foreign profits. Of course, to keep their promise to break even, their version of “tax reform” would have to increase U.S. taxes on profits earned here in the United States.

One could point out that the U.S. already collects almost nothing in taxes on American corporations’ foreign profits. But corporate leaders would like to convert our current indefinite “deferral” of taxes on foreign profits into a permanent exemption.

Why would anyone think this approach would help our “international competitiveness”? Well, you have to understand what corporate leaders mean by that term. They don’t mean making it more attractive to invest and create jobs in the United States. Quite the contrary. They mean making it more attractive for companies to invest and create jobs in foreign countries.

Real corporate tax reform would do the opposite, by ending the indefinite deferral (PDF) of tax on foreign profits. Companies may still invest abroad for economic reasons, but at least we wouldn’t be subsidizing them to do so.

There’s a second point. Due to a plethora of tax subsidies, we also have very low taxes on corporate profits earned in the United States. And a fat lot of good that’s done us economically. So we should be increasing corporate taxes on U.S. profits, too. Not on all companies, to be sure. But on average, Fortune 500 corporations now pay only about half the official 35 percent corporate tax rate on their U.S. profits. A quarter of these giant corporations now pay less than 10 percent in U.S. taxes on their U.S. profits, including many that pay nothing at all.

Closing the loopholes that allow such rampant domestic corporate tax avoidance, including curbing loopholes that allow companies to artificially shift their U.S. profits into foreign tax havens, should be a key part of a balanced deficit reduction strategy. By doing so, we can not only help get deficits under control, we can also afford to make the investments in education and infrastructure that will really make investing and creating jobs in the United States more likely.

So Sen. Schumer, congratulations on pointing out the need for more revenue from wealthy individuals. Now, if you can just appreciate the equally important need to get more revenues from America’s tax-avoiding corporations, well, you’ll be a real tax reform hero for our time.

It recently came out that one man—billionaire Manuel Moroun—is almost singlehandedly responsible for getting Proposal 5, (dubbed the “two thirds” tax proposal by supporters), onto Michigan’s November ballot.  If enacted, the proposal would require two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  The results of such a “supermajority” restriction would be unambiguously bad for Michigan.

Paying for schools, roads, and police would become much more difficult over time as the costs of these services grow and Michigan’s narrow sales tax, flat income tax, and flat gas tax would struggle to keep up. The risk of a downgrade in Michigan’s credit rating would also increase under a supermajority rule, as the range of options for keeping the state’s finances in order would be drastically reduced.  Tax reform would become much more difficult, as many loophole-closing proposals could suddenly be blocked by a small minority of legislators.  And the ability of Michigan’s government to deal responsibly with unexpected fiscal crises would be greatly reduced.

Unsurprisingly, all of these dangers are of little concern to folks like Stephen Moore at the Wall Street Journal, who’s almost certainly never met a tax cut he didn’t like.  But many stakeholders based in Michigan, who would actually have to deal with these consequences, have concluded that a supermajority requirement would do far more harm than good.

Both of the state’s largest business groups—the Chamber of Commerce and Business Leaders for Michigan—have come out against the measure.  In noting just how restrictive the measure would be Chamber President Rich Studley quipped that “on some days you couldn’t get a two-thirds vote in the Legislature on what time of day it is.”  Even Governor Rick Snyder, whose record on tax policy we’ve criticized a number of times, opposes the supermajority rule on the grounds that it’s “not good public policy” and would have “unintended consequences.”  Other opponents include the Senate Majority Leader, AARP Michigan, the Farm Bureau, and the Michigan Municipal League, among many other groups.

And it appears that Michigan voters are getting the message.  As the Detroit News reports, polling show that “support for Proposal 5 … plunged 17.5 percentage points, from 68 percent a month ago to 50.5 percent” in mid-September. That is not only the most recent poll, but it’s also relevant because ballot measures usually need at least 60 percent support in September to have much chance of passing in November, since support tends to wane closer to the election.

The Michigan League for Human Services has more details on why a supermajority requirement is a super-bad idea (PDF) for Michigan, and the Center on Budget and Policy Priorities has a report on the issue as well. And at CTJ, we’ve been writing for years about how these rules cripple legislatures and hamstring democracy by undermining the power of elected representatives.

Oh, and there’s a chilling, masters-of-the-universe twist to the story, too. The reason this one man went to all that trouble and expense to buy the proposal a spot on the ballot is not because he’s on some ideological crusade. Rather, he wants to make sure Michigan can never afford to invest in a new bridge to Canada – because it would compete with the one he owns. 

Image from Metro Times, Detroit.

While most commentators have focused on the back-and-forth between President Barack Obama and former Governor Mitt Romney over tax rates and deficit reduction during the first presidential debate, we paid extra close attention to what the candidates said about corporate and small business taxes. Unfortunately, we found what both candidates had to say really wanting.

Corporate Tax Reform

Early in the debate, Obama noted that he and Romney have something of a consensus over corporate taxes in that they both believe that “our corporate tax rate is too high.” If there’s such an agreement, it’s based on a fundamental misunderstanding. While the U.S. has a relatively high statutory corporate tax rate of 35 percent, the effective corporate tax rate (the percentage of profits that corporations actually pay in taxes) is far lower because of the loopholes they use to shield their profits from taxes. CTJ has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.

President Obama proposes to close corporate tax loopholes, but would give the revenue savings right back to corporations as a reduction in the statutory tax rate from 35 percent to 28 percent, resulting in no change in revenue, as outlined in his corporate tax reform framework released earlier this year. (During the debate Obama actually said he’d lower the statutory rate to 25 percent, which seems more likely a misstatement than an intentional policy shift.)

In contrast, 250 non-profits, consumer groups, labor unions and faith-based groups have called for a corporate tax reform that actually raises revenue in order to pay for critical government investments and reduce the budget deficit.

Of course, Governor Romney also proposes a deep cut in the statutory corporate tax rate (to 25 percent) and is far more vague on whether he would bother to offset the costs.

Romney took issue with Obama’s claim during the debate that the tax code currently allows companies to take a deduction for moving plants overseas, saying that he had “no idea” what Obama was talking about and that if such a deduction really exists that he may “need to get a new accountant.” Technically, Obama is right that the tax code currently allows companies to take a deduction for business expenses of moving a plant overseas, but he leaves out the fact that companies are allowed to deduct most business expenses, including those associated with moving facilities. In any case, Romney certainly does not to need to hire a new accountant.

What both candidates missed during this discussion was that our current tax system does in fact encourage corporations to move operations overseas by allowing them to defer taxes on foreign profits. To his credit, Obama proposed, as part of his 2013 budget and in his framework for corporate tax reform, several reforms to the international tax system that would reduce the size of this tax break, although he has not gone as far as to call for an end to deferral entirely. In contrast, Romney wants to blow a giant hole in our corporate tax by moving the US to territorial tax system, under which US companies would pay nothing on offshore profits.

Small Business Taxes

During the debate Romney revived a classic tax myth by claiming that allowing the Bush tax cuts to expire for income over $250,000 will harm small businesses because a lot of businesses “are taxed not at the corporate tax rate, but at the individual rate.” Obama pushed back noting that he had “lowered taxes for small businesses 18 times” and that under his plan “97 percent of small businesses would not see their income taxes go up.”

A Citizens for Tax Justice (CTJ) analysis found that only the 3 to 5 percent richest business owners would be lose any their tax breaks under Obama’s plan. The CTJ report also points out that if you’re a business owner, tax breaks affect how much of your profits you can take home, but not whether or not you have profits. A business owner will make investments that create jobs if, and only if, such investments will lead to profits, regardless of what tax rates apply.

In an attempt to push his small business claim even further, Romney cited a study by the National Federation of Independent Businesses (NFIB) claiming that Obama’s plan will force small business to cut 700,000 jobs. When the NFIB report came out during the summer, the White House did a fine job of pointing out the many, many outrageous distortions in the report. Just to take one, the NFIB report makes assumptions about the relationship between taxes and investment that are far out of line with those of the non-partisan Congressional Budget Office and even the Treasury Department during the Bush administration.

President Obama stated that the oil industry receives “$4 billion a year in corporate welfare” and added that he didn’t think anyone believes that a corporation like ExxonMobil really needs extra money coming from the government. Romney hit back saying that the tax break for oil companies is only $2.8 billion a year and that Obama had enacted $90 billion worth of tax breaks in one year for green energy, which he said dwarfed the oil tax breaks 50 times over.

On the oil company tax break claims, Obama’s figure is much closer to the truth. The President’s 2013 budget has a package of provisions that would eliminate or reduce special tax breaks for the fossil fuel industry and the Treasury estimates this would raise $39 billion over a decade. (See page 80 of this budget document.) A CTJ report explains the arguments for these provisions. Ironically, the oil industry itself puts this number much higher, claiming that the Obama administration’s proposal would eliminate about $8.5 billion in tax breaks it receives annually.

In addition, FactCheck.org points out that Romney’s claims on Obama’s clean energy tax breaks were largely bogus. Just to list some of the problems with Romney’s $90 billion claim, FactCheck.org notes that these breaks were spent over two years not one, that the figure includes loan guarantees not just actual spending, and that many of these “breaks” were spent on infrastructure projects.

During the first presidential debate of this election season, President Barack Obama and former Governor Mitt Romney’s discussion focused primarily on what is arguably the most important issue of this election: tax policy. Over half of the debate was spent on the intricacies of tax policy, from the treatment of small businesses to the precise revenue cost of trillions of dollars in proposed tax cuts.  Here we offer some criticism and context.

Size of the Candidates’ Tax Cut Plans

Early in the debate Obama explained that Romney’s “central economic plan calls for a $5 trillion tax cut – on top of the extension of the Bush tax cuts.” Romney denied this, saying “I don’t have a $5 trillion cut. I don’t have a tax cut of the scale that you’re talking about.” Romney added that his plan would not “reduce the share of taxes paid by high-income people” and that it would “provide tax relief to people in the middle class.”

The truth is that Romney isn’t proposing a $5 trillion tax cut, he’s proposing to cut taxes by over $10 trillion over ten years. Romney proposes new tax cuts costing around $500 billion a year (according to the Tax Policy Center) on top of making permanent all the Bush tax cuts, which by themselves would cost $5.3 trillion over a decade.

Romney is proposing to make up some of the $5 trillion in additional tax cuts by closing loopholes, eliminating deductions and other tax expenditures, but he has kept his plan secret so far and has refused to name even a single tax expenditure he would eliminate or loophole he’d close.

An analysis by Citizens for Tax Justice found that even if millionaires were forced to give up all the tax expenditures that Romney has put on the table, his tax plan would still give a tax break of at least $250,000 on average for individuals making over $1 million. That is, he simply cannot back up his assertion that he is “not going to reduce the share of taxes paid by high- income people.” And if he really is going to make up the revenues we’ll lose to his rate cuts, taxes would have to go up for other taxpayers.

Throughout the debate, Romney referred to several studies showing that his plan is mathematically possible (a low standard to meet to be sure), but the reality is that the studies he’s referring to aren’t all actual studies, nor do they fully support his plan.

It’s important to note that while Romney’s tax plan is the height of fiscal irresponsibility, Obama himself is proposing to extend most of the Bush tax cuts, at a cost of $4.2 trillion over the next ten years. The President assured the audience that he wants to “continue the tax rates – the tax cuts that we put into place for small businesses and families.  But,” he continued, “for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president,” that is, the pre-Bush tax cuts rate.

CTJ has analyzed Obama’s plan and found that extending 78 percent of the Bush tax cuts will lose far too much revenue in the long run. The President’s plan would extend the tax cuts for the first $250,000 a married couple makes. We also found that married couples making between $250,000 and $300,000 would still continue to enjoy, on average, 98 percent of the Bush tax cuts. Fewer than two percent of taxpayers would lose any part of the Bush tax cuts under Obama’s plan, so it’s hardly a bold proposal for reducing the deficit and restoring urgently needed revenues.

In other words, neither presidential candidate showed on Wednesday night that they have fully come to terms with the fact that the United States cannot afford continuing to hand out trillions of dollars in tax cuts.

Long Term Deficit Reduction Plans

At a Republican presidential debate over a year ago, Romney joined with all the other candidates in saying that they would reject any deal that raised tax revenues, even one that would include $10 in spending cuts for every $1 in additional tax revenue – ten times more in crippling spending cuts than tax increases. When pushed by the moderator during Wednesday’s presidential debate, Romney stood firm, saying that he had “absolutely” ruled out the possibility of raising additional revenue to reduce the deficit.

The Simpson-Bowles Commission plan to balance the budget, which Romney praised last night, however, requires a ratio of $1 in spending cuts to $1 in revenue increases (compared to the budget baseline that Obama and many members of Congress use). Ironically, by seemingly embracing Simpson-Bowles, Romney put himself to the left of Obama, whose own long term deficit reduction plan actually cuts fewer taxes and less spending than Simpson-Bowles. As Obama explained in the debate: “the way we do it is $2.50 for every cut, we ask for a dollar of additional revenue.”  (And he repeatedly points out, of course, that his health care legislation will slow the deficit’s growth by reducing Medicare costs.)

Neither candidate is acknowledging the elephant in the room. In the long-run, what they really have to do to fix the budget deficit is just to stop extending most or all of the Bush tax cuts, or find a way to pay for those parts they do extend.

The difficulty of enacting real tax reform is on display in Louisiana, where a commission studying the state’s tax breaks just heard from some of the industries and interests seeking to protect their special breaks and loopholes.  For example, a retail group claimed that a sales tax exemption for international tourists doesn’t actually cost the state because it raises $1.80 in revenue for every $1.00 foregone. In the end, though, it did cost the state $1.1 million in sales taxes last year.

Transportation officials in Kansas and Tennessee are in an increasingly common situation: looking for new revenues as their states’ gas taxes dwindle because of rising construction costs and improving vehicle fuel-efficiency.  Officials in both states seem to recognize that a gas tax hike is needed, but in Tennessee at least, the state’s anti-tax governor has reportedly ruled that out.

In November, voters in Kansas will be asked to decide whether their state constitution should be changed to lower taxes on boats and other watercraft. Changing a state’s constitution to reward boat purchases? Seriously? The experts who wrote the ITEP Guide warn that “tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources or, worse, to schemes whose sole aim is to exploit such preferential tax treatment.”  Let’s hope Kansas voters don’t start down this slippery slope.

The Savannah Morning News editorial board is urging the state legislature to fix a tax break in the Georgia Tourism Development Act which was intended to encourage development but “apparently is indecipherable” and can’t be implemented. The bureaucratic quagmire the legislation created highlights one of many problems with trying to micromanage economic development through the tax code.

Read the PDF version of this document.

As President Barack Obama and former Massachusetts Governor Mitt Romney face off in their first debate, a number of big-picture questions about tax policy remain unanswered by either candidate.
 

Given the budget deficit, why should we extend all of the Bush tax cuts (as Romney proposes) or most of the Bush tax cuts (as Obama proposes)?

■ The Congressional Budget Office estimates that a full extension of the Bush tax cuts, which Governor Romney supports, would cost about $5.2 trillion over ten years, including interest, while President Obama’s proposal to extend most, but not all, of those tax cuts will cost about $4.3 trillion over ten years, including interest.

■ That means if Congress enacts one of these approaches, we lose either $5.2 trillion or $4.3 trillion, compared to current law (compared to what would happen if Congress does nothing).

Given that the Bush tax cuts, taken together, disproportionately benefit the rich, why should we extend all or most of them?

■ Citizens for Tax Justice estimates that the richest one percent of Americans would receive 32 percent of the benefits of a full extension of the Bush tax cuts, which Governor Romney supports.

■ CTJ finds that the richest one percent would receive 11 percent of the benefits from Obama’s proposal to extend most, but not all, of the Bush tax cuts (and the other tax cuts Obama wants to extend).

■ By way of comparison, the poorest fifth of Americans would get just one percent of the benefits from the Republican approach and just 3 percent of the benefits from Obama’s approach.

Why have neither Obama nor Romney proposed to end the tax loophole that is targeted to the richest one percent of taxpayers — the special, low tax rate for capital gains?

■ Romney proposes to enact new tax cuts (on top of extending the Bush tax cuts) but claims that he can offset the costs by limiting tax expenditures (tax deductions, exclusions, credits and other special breaks). But Romney pledges to retain the most unfair tax expenditure of all, the lower rate for capital gains, which allows wealthy investors like himself and Warren Buffett to pay a lower effective tax rate than many working people.

■ Meanwhile, Obama proposes to limit the value of each dollar of deductions and exclusions for the rich to 28 cents, and he would impose a minimum tax on people making more than $1 million. Both measures are relatively complicated and neither would entirely eliminate situations in which wealthy investors pay a lower effective tax rate than wage-earners.

■ The most straightforward reform would be to eliminate the most unfair tax expenditure by repealing the special rate for capital gains and simply taxing all personal income under the same tax rates. CTJ estimates this would raise at least $533 billion over a decade.

Why does neither candidate propose to raise needed revenue from corporate tax reform?

■ President Obama has proposed to close corporate tax loopholes, while Governor Romney has been unclear on this point. But any revenue saved from corporate loophole-closing under either candidate would be given back to corporations in the form of a reduction in their tax rate. Both candidates have proposed to reduce the official 35 percent corporate income tax rate (to 28 percent in the case of Obama and 25 percent in the case of Romney).

■ Corporations claim that they are burdened by the statutory tax rate of 35 percent, but their effective tax rate (the percentage of profits they actually pay in taxes) is usually far lower than that because they use loopholes to shield much of their profits from taxes.

■ Each of the reasons used by corporate lobbyists to argue for lower taxes is easily refuted. For example, they claim that the corporate tax is ultimately borne by the workers, but if that was true, then corporations wouldn’t bother lobbying Congress to lower it.

■ An obvious way to address our fiscal problems is to close corporate tax loopholes and use the revenue to reduce the deficit or pay for education, infrastructure or other investments.