A big issue in the 2012 elections will be tax policy. We have already heard from president Obama that he wants to raise taxes on those earning over a million dollars per year; the so-called Buffett Rule that Obama is pushing would raise about $4 billion in extra revenue in 2013. Obama also wants to raise taxes on oil companies. Mitt Romney has a plan to reduce the tax rates by 20% and offset the loss of revenue by eliminating or reducing tax deductions, particularly for the wealthy. Other Republican and Democrat candidates for either the Senate or the House of Representatives has mentioned other plans, but these are almost all a variation of the Obama or Romney plans.
In order to understand what these plans mean, we have to look at how they change things from the present tax system. That, in turn, means we have to decide what the present tax system really is. While that sounds like a silly point, it is not. The current tax system has a multiple personality disorder. We have the 2012 rates and deductions which were set by the Bush tax cuts twelve years ago. As of January 2013, the law requires a return to the rates in effect prior to the Bush tax cuts. This change alone will bring in about an additional $400 billion in revenues. As of now, we have a payroll tax rate of 4.2% on earned income subject to a cap. On January 1, 2013, this payroll tax rate rises to 6.2%. As of now, the Alternative Minimum Tax has been modified so that most taxpayers are not affected by it. As of January of 2013, the old original AMT comes back. As a result something like a third of all taxpayers will be subject to the AMT. There are more changes as of January of 2013, but these are the main ones. If nothing is done, taxes on America will rise by about half a trillion dollars on January 1, 2013.
President Obama has not clearly addressed how he wants to proceed in 2013. In December of 2010, Obama decided that he wanted to keep the Bush tax rates in place in order to avoid pushing the economy back into recession. The decision as to what to do with regard to taxes in January 2013, is the biggest economic issue facing the country at the moment. It is no wonder that Obama has been silent. On each important issue during his term, Obama has made generalized speeches on the subject, but he has never offered specific solutions. Why should this be any different?
Romney's tax plan addresses the issue of 2013 by changing the entire structure of the tax code. As a result, most of the 2013 changes become moot.
No matter what plan is considered, though, the baseline remains a critical consideration. All of the estimates from the CBO compare proposals with the legally mandated future tax rates. In other words, in the world of the CBO, the Bush tax cuts expire, the payroll tax goes back to the full amount and the AMT kicks back in to hit tens of millions of taxpayers. This will undoubtedly be used by Democrats to attack the Romney plan. I can hear them now telling us that under the Romney plan government revenue will decline by a few hundred billion dollars. Of course, that is compared to the legally mandated baseline. By staying silent on the issue, Obama will surely try to have it both ways. He will not commit to following the current legally mandated path with its huge increases in taxes, but he will not put forth any comprehensive plan that could be compared to the current law.
There are two real truths to learn from this mess regarding future tax rates. First, when you hear debate in the next six months about tax rates and revenues, remember to always ask what baseline is being used. It makes quite a difference. Second, we are hearing more and more about how the expiration of the Bush Tax Cuts will mean an enormous tax increase for middle income taxpayers in the USA. Next time you hear that, remember that for the last twelve years the Democrats have been telling us that the Bush Tax Cuts were just a break for the rich. Now, these same folks are having to admit that the overwhelming bulk of these tax cuts went to the middle income taxpayers. I wonder if the press will ever call them on this long lasting lie.
No comments:
Post a Comment