How much would that new bipartisan Senate “Gang of Six” plan to cut the deficit by $3.7 trillion over a decade raise taxes? And how about your own tax bill?
Those seem like straightforward questions and pretty important ones, considering the praise the plan has garnered from President Obama as well as outside budget hawks like billionaire Blackstone Group co-founder Peter Peterson. But the answers are muddied by politics, arcane Washington budgeting conventions and the decisions the plan leaves to a future fast track “tax reform” by Congress.
How’s this for confusing? Senate Budget Committee Chairman Kent Conrad (D-N.D.), a Gang of Six member, told reporters that the plan would raise $1.2 trillion in new revenues over a decade. Yet the Gang also distributed an executive summary asserting that if the Congressional Budget Office were to score the plan, it would find it has “net tax relief of $1.5 trillion”. In other words, according to this summary, it would actually cut the nation’s collective tax bill.
So which is it?
The answer is that the plan will raise $1.5 trillion less than the CBO baseline projection ---a projection that includes only tax law currently on the books and not any popular expectations for what the law might be. In this CBO baseline, all the Bush tax cuts, including those for the middle class, expire at the end of 2012, when the two-year tax cut extension President Obama negotiated with Republicans last December ends. Also in this baseline, the alternative minimum tax “fix”, which Congress passes every year or two to protect tens of millions of middle class Americans from the AMT, expires as scheduled at the end of 2011. As economist Leonard Burman puts it, the CBO baseline assumes “the AMT engulfs the middle class in a web of higher taxes and mind-numbing complexity”.
But the CBO also has an “alternative fiscal scenario” which it says includes the continuation of certain policies “that people have grown accustomed to—because those policies are in place now or were in place until recently.” That alternative includes the AMT fix and most of the Bush tax cuts, but not tax cuts for families earning more than $250,000 which Obama and many Democrats want to end. In this alternative scenario, the 2009 estate tax law, with a $3.5 million exemption and 45% rate is assumed, as opposed to the $5 million exemption and 35% rate in the 2010 Obama-Republican deal. (You can find more on scenarios in the CBO’s June 2011 Long-Term Budget Outlook here.)
The alternative scenario is the one President Obama’s bipartisan deficit commission used in its final report last December, which called for raising $800 billion over a decade by reforming the tax code----lowering rates but cutting or limiting a slew of credits and deductions (tax expenditures, in budget speak).
Similarly, the Gang of Six wants to use a loophole-closing, rate-lowering reform to raise $1 trillion over a decade for deficit reduction. (The Gang also called for raising $133 billion extra for highway spending over 10 years, without touching the gas tax. So it seems that money too might come from the income tax overhaul.) While the Gang left the heavy lifting of tax reform to the Senate Finance Committee, it suggested that the top individual and corporate tax rates be reduced to 23% to 29%, down from the current 35%. (Conrad's estimate that the plan would raise $1.2 trillion is apparently based on the CBO alternative, which it calls a "plausible" baseline.)
But before the Gang of Six plan can go anywhere, there’s yet another crucial baseline to consider-- what might be called the Grover Norquist line-in-the-sand baseline. According to Americans For Tax Reform President Norquist, the creator of a Taxpayer Protection Pledge that has been signed by all but six House Republicans, any Congressional action (or in some cases, inaction) that raises net taxes (other than through economic growth) is a tax hike and
violates the pledge. (See related story, here.) So Norquist's baseline includes the extension of all the Bush tax cuts, including for the rich, as well as the $5 million estate exemption. Moreover, in Norquist’s world view, even the elimination of business subsidies delivered through the tax code---which Gang of Six member Sen. Tom Coburn (R-OK) derided Monday as “socialism and corporate welfare” ---is a verboten tax hike, unless it’s offset by an equal tax cut. Be assured that once ATR has analyzed the Gang's plan, it will judge the proposed tax hikes to be far in excess of $1.2 trillion. (Add: The Tax Policy Center's Donald Marron notes here that relative to the taxes people are paying now, the Gang of Six plan is roughly a $2 trillion increase.)
As for what impact the Gang's plan would have on your own personal tax bill, that depends not only on details of any tax reform (details the Gang left to others), but also on how much you use various tax breaks and the baseline you pick. For example, Obama’s deficit commission offered an “illustrative” reform that would reduce the top tax rate to 28%, but eliminate most current tax breaks, including the current deduction for interest paid on up to $1.1 million of primary home and second home mortgage debt. Instead, each family would be allowed a 12% credit against interest paid on a primary mortgage of up to only $500,000. That means higher income folks with big mortgages and vacation homes would get hit hard.
Then there’s that wonky, but politically charged baseline question again. The Tax Policy Center estimated that the debt commission's illustrative plan, when compared to the CBO baseline---the one which assumes the Bush tax cuts are allowed to expire---would mean that all but the richest 1% would pay less of their income in tax and the richest 1% would pay just 1.4% more. Yet if one assumes the Bush tax cuts, including those for the rich, continue--what I've called the Grover Norquist baseline---than middle income folks would end up paying about 1% more of their income in federal tax; the top 20% would pay 3% more; and the richest 1% would have to fork over 5.5% more of their income to Uncle Sam, the Tax Policy Center calculated. The 400 highest-income Americans, who paid an effective tax rate of just 18.1% in 2008, would face an even bigger tax hike. That's because the debt commission's illustrative reform eliminated the special top 15% rate for long term capital gains--a break which currently enables hedge fund managers and the uberrich to pay lower effective tax rates than high earning salaried folks.
- alternative minimum tax
- Congressional Budget Office
- estate tax law