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The expiration of Bush-era tax cuts in January has sparked a partisan bickering match this election season, and much of the rhetoric from both Democrats and Republicans is misleading. A look at three prominent arguments, sorting the spin from the facts:
Republicans warn that America faces the largest tax increase ever if Congress doesn’t extend the tax cuts enacted in 2001 and 2003, which are due to expire in January.
“Democrats in Washington are now plotting the largest tax increase in history,” says the website for Republicans on the House Ways and Means Committee. Sen. Orrin Hatch, R-Utah, makes a similar claim in a press release, and so does Rep. Tom Price of Georgia, chairman of the Republican Study Committee.
Few members of Congress want to let all the tax cuts expire. Republicans want to extend all the tax cuts, and President Barack Obama — along with Democratic leaders in Congress — want to extend them for individuals making less than $200,000 and married couples making less than $250,000.
But what if they don’t reach an agreement — a distinct possibility — and the result is that all the tax cuts expire?
The potential tax increases would be significant if Congress does not act, affecting taxpayers at every income level. But by most measures, they wouldn’t be nearly as big as those imposed during World War II.
If all the tax cuts expire, the government would collect about $198 billion more in revenue in 2011 and $295 billion more in 2012. Over the next decade, taxes would go up a total of about $3.9 trillion, according to the nonpartisan Joint Committee on Taxation, which provides the official estimates for Congress.
That would be equal to about 2 percent of the nation’s Gross Domestic Product each year, the most common measure used by economists.
The Revenue Act of 1942 increased taxes by slightly more than 5 percent of GDP, and the Revenue Act of 1941 increased taxes by 2.2 percent of GDP, according to a 2006 Treasury Department research paper.
To measure it another way, the 1942 tax increase accounted for more than 71 percent of federal revenues, while next year’s potential tax increase would raise revenues by less than 10 percent.
Republicans argue that the dollar amount of next year’s potential tax increase would be the largest, even taking into account inflation. That’s true, but it doesn’t take into account population increases — the population in 1942 was less than half of what it is today — or the size of the economy.
Democrats argue that Republicans want to add $700 billion to the national debt over the next decade by extending tax cuts for the wealthiest Americans.
“We can’t give $700 billion away to some of America’s wealthiest people,” Obama said Monday. “We’ve got to make sure that we are responsible stewards for our budget.”
It is true that extending tax cuts for top earners would add an additional $700 billion to the national debt over the next decade. But Democrats rarely mention that Obama’s plan to extend tax cuts for middle- and low-income workers would add more than $3 trillion to the national debt over the same period.
The government’s official budget projections envision all the tax cuts expiring in January because that is what current law says. When the tax cuts were passed in 2001 and 2003, the Republicans who controlled Congress at the time decided to have them expire to conform with budget rules.
Making all the tax cuts permanent would add about $3.9 trillion to the national debt over the next decade. Obama’s plan would cost a little more than $3 trillion over the next decade, about $700 billion less than the Republican plan.
Republicans say small businesses would be hurt by Obama’s plan to let tax cuts expire for individuals making more than $200,000 and couples making more than $250,000; Democrats say few small businesses would be affected.
Both sides make valid points on the small business debate, though neither side tells the full story.
Most small business owners report income from their businesses on their individual income tax returns, paying taxes at the same marginal rates as everyone else. Just under 750,000 taxpayers who report business income would get a tax increase under Obama’s plan, according to the Joint Committee on Taxation.
That’s about 3 percent of the people who report business income, which is why Democrats say few small businesses would be affected.
However, those taxpayers who would see an increase account for half the business income reported on individual returns, about $500 billion in income. Republicans argue that those business owners — the ones making the most money — are more likely to hire workers than small business owners who make less money.
Copyright © 2010 The Associated Press