Myths & Falsehoods: The Tax Debate
With the tax cuts for the wealthy set to expire at the end of the year, the issue is once again a topic of debate among members of Congress, Washington think tanks, and the media. Unfortunately, as with most issues in DC, the debate over taxes has been clouded and obscured by myths, falsehoods, half-truths, and downright lies. Below, PoliticalCorrection.org has compiled and refuted the most common falsehoods surrounding the tax debate.
MYTH: Cutting Taxes For The Wealthy Stimulates The Economy
FACT: Wealthy Americans save, rather than spend, money from tax cuts
Bloomberg News: "Give The Wealthiest Americans A Tax Cut And History Suggests They Will Save The Money Rather Than Spend It." According to Bloomberg News: "Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it. Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody's Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell. The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy. President Barack Obama wants to extend the cuts for individuals earning less than $200,000 and couples earning less than $250,000 while ending them for those who earn more." [Bloomberg News, 9/14/10]
New York Times: "Research Suggests That Tax Cuts... Have Limited Ability To Bolster The Flagging Economy." According to the New York Times: "The concept of lower taxes is so appealing to voters that many embrace them as an economic cure-all. But economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand. The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. The report added that tax cuts for high earners would have the smallest 'bang for the buck,' because wealthy Americans were more likely to save their money than spend it." [New York Times, 9/10/10]
FACT: Cutting business taxes alone does not incentivize them to hire
CBO: Cutting Business Taxes "Does Not Create Much Incentive For Them To Hire More Workers." According to the Congressional Budget Office: "Deferring the scheduled increases in tax rates in 2011 would help some businesses as well as households. In particular, it would keep lower tax rates in place in that year for businesses that do not pay the corporate income tax (the pass-through entities such as sole proprietorships, partnerships, S corporations, and limited liability companies). However, increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products." [Congressional Budget Office, 2/23/10]
FACT: Tax cuts are the least effective way to stimulate economic growth
CBO: Among Eleven Proposals To Spur Economic Growth, Cutting Income Taxes Ranks Last. Below is a chart created by the Congressional Budget Office to show the "cumulative effects of policy options on employment in 2010 and 2011":
[Congressional Budget Office, 2/23/10]
FACT: There are more effective ways to spur economic growth
CBO: Extending Unemployment Benefits Is "Both Timely And Cost-Effective In Spurring Economic Activity And Employment." According to the Congressional Budget Office: "Extending additional unemployment benefits would directly help those who would otherwise exhaust their unemployment benefits between March and December of this year. Households receiving unemployment benefits tend to spend the additional benefits quickly, making this option both timely and cost-effective in spurring economic activity and employment. A variant of this option would extend assistance with paying health insurance premiums, which would allow some recipients to maintain health insurance coverage they would otherwise have dropped. This variant would result in increased demand for health care services, and it would increase the income available to purchase other goods and services for recipients who would have purchased insurance even without this special assistance. Both policy options could dampen people's efforts to look for work, although that concern is less of a factor when employment opportunities are expected to be limited for some time. CBO estimates that those policies would raise output cumulatively between 2010 and 2015 by $0.70 to $1.90 per dollar of total budgetary cost. CBO also estimates that the policies would add 8 to 19 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost." [Congressional Budget Office, 2/23/10]
CBO: "Infrastructure Spending Directly Increases Employment." According to the Congressional Budget Office: "Infrastructure spending directly increases employment because workers are hired to undertake construction projects. It also adds to demand for goods and services through purchases of material and equipment and through additional spending by the extra workers who are hired; as with other policy options discussed in this analysis, that increase in demand would lead to further hiring... CBO estimates that additional investments in infrastructure would raise output cumulatively between 2010 and 2015 by $0.50 to $1.20 per dollar of total budgetary cost and would add 2 to 4 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost." [Congressional Budget Office, 2/23/10]
CBO: Aid To State Governments Results In Fewer Layoffs, Increased Safety Nets, Fewer New Taxes. According to the Congressional Budget Office: "Without further aid from the federal government, many states would have to raise taxes or cut spending by more than they would if aid was provided. Such actions would dampen spending by those governments and by households in those states, and more state and private jobs would be lost. Under current policies, states will be taking such balancing actions on an ongoing basis, so federal aid that was provided promptly would probably have a significant effect on output and employment in 2010 and 2011. Such aid could lead to fewer layoffs, more pay raises, more government purchases of goods and services, increases in state safety-net programs, and fewer increases in state taxes; some might be saved for future use. CBO estimates that providing aid to states for purposes other than infrastructure would raise output cumulatively between 2010 and 2015 by $0.40 to $1.10 per dollar of total budgetary cost. CBO also estimates that the policy would add 3 to 7 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost." [Congressional Budget Office, 2/23/10]
CBO: Tax Credits For Low-Income Households Are More Effective Than Tax Cuts For The Wealthy. According to the Congressional Budget Office: "Refundable credits are often phased out when income increases above some amount and thus are effectively limited to lower- and middle-income households. Moreover, credits that are refundable provide a larger income boost to those households than do comparable credits that are not refundable, because lower-income households are more likely not to owe income tax. Therefore, providing additional refundable credits would increase after-tax income for households that are more likely to spend a greater share of the funds received. As a result, such credits would increase output and employment by more per dollar of budgetary cost than would cutting taxes for a broader set of taxpayers. CBO estimates that providing additional refundable tax credits would raise output cumulatively between 2010 and 2015 by $0.30 to $0.90 per dollar of total budgetary cost. CBO also estimates that the policy would add 3 to 6 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost." [Congressional Budget Office, 2/23/10]
MYTH: Not Renewing Tax Cuts For The Rich Would Harm Small Businesses
FACT: Allowing tax cuts for the wealthy to expire would only affect 3% of small businesses.
PolitiFact: "Only 3 Percent" Of Taxpayers With Business Income Would Be Affected By The Democratic Proposal. According to the nonpartisan PolitiFact.com:
What impact would raising taxes on the top two income brackets have on small businesses? According to the Joint Committee on Taxation, the same source that Neugebauer cited in his blog post, "In 2011 just under 750,000 taxpayers with net positive business income...will have marginal rates of 36 or 39.6 percent under the president's proposal." That translates into only 3 percent of all taxpayers with positive business income. Yes, you read that right. Only 3 percent of all taxpayers who reported having positive business income will see their taxes go up under the proposed Democratic initiative.
We also consulted experts at the Tax Policy Center, a joint project from the liberal-to-centrist-leaning Brookings Institute and the liberal Urban Institute. James Nunns, a researcher at the Urban Institute, directed us to the center's July 2010 analysis of the distribution of business income by statutory marginal rate for the year 2011. The report assumes that Congress goes through with its plan to only increase taxes on individuals making over $200,000 and couples with over $250,000 in income. It turns out, 774,000 tax filers in the top two brackets --the only ones that will see a tax increase -- will have positive business income. Divide that by the roughly 36 million tax filers who report business income (positive or negative), and you get 2.1 percent. In other words, still assuming that having any amount of income from a small business means that you are actually a business owner (big assumption), only about 2.1 percent of businesses will face the prospect of higher taxes based on the Democratic proposal. [PolitiFact.com, 8/4/10, emphasis added]
PolitiFact: 2/3 Of Tax Filers In Top Two Brackets Report Business Income As Less Than 50% Of Their Income. According to the non-partisan PolitiFact.com:
It's impossible to know how many of these high earners are what most people think of as small business owners. One indication, however, might be if these wealthy taxpayers reported that most of their income was from this business-type income. The nonpartisan Tax Policy Center analyzed IRS data in March 2009, looking to see how many wealthy tax filers could say that half of their income or more came from business income. The center found that, among the wealthiest filers -- the top 1 percent -- only 25 percent earned more than half their income from business-type income. The percentages for non-wage income were even smaller among taxpayers earning less. (Editor's note: After we initially published this item, the Tax Policy Center released a new analysis looking at business income by tax bracket. They found that in the top bracket, only 32.5 percent earned more than half their income that way.) [PolitiFact.com, 7/25/10, emphasis added, parentheses original]
Non-Partisan Joint Committee On Taxation Report Actually Says That 50% Of Total Business Income — Not "Small Business Income" — Will Be Taxed At Higher Rates. According to the non-partisan Joint Committee on Taxation report on President Obama's proposals: "The staff of the Joint Committee on Taxation estimates that in 2011 just under 750,000 taxpayers with net positive business income (three percent of all taxpayers with net positive business income) will have marginal rates of 36 or 39.6 percent under the President's proposal and that 50 percent of the approximately $1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent. These figures for net positive business income do not imply that all of the income is from entities that might be considered 'small.' For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million." [Joint Committee on Taxation report, 7/12/10, emphasis added]
FACT: GOP definition of "small business" includes authors, movie stars, professional athletes, and even President Obama
Bloomberg News: GOP Definition Of Small Business Includes "George Soros, Most Movie Stars And Obama Himself Small-Business Owners." According to Bloomberg News:
Senate Republican leader Mitch McConnell says President Barack Obama wants to subject half of all small-business income to a tax increase, a move that he says would strike a blow at the U.S. job-creation engine.
McConnell's numbers only add up if you consider people like billionaire investor George Soros, most movie stars and Obama himself small-business owners, tax experts say.
That's because the lawmaker is basing his figure on a broad definition of the term that experts say includes authors, actors and athletes who employ few if any workers. It also encompasses businesses that many people wouldn't consider small, such as Soros's hedge-fund firm and major law partnerships. [Bloomberg, 9/20/10]
PolitiFact: Business Income Reported On Tax Returns Often Comes From Book Royalties, Speaking Fees, And Other Non-Job-Creating Sources. According to the non-partisan PolitiFact.com:
The U.S. Treasury Department found in 2007 that many of the wealthiest tax filers report some type of non-wage income, such as income from a sole proprietorship, a partnership or an S corporation...
Does this mean that all those wealthy taxpayers were small business owners? Probably not. This kind of income could be reported from anyone who earned money from a source other than a regular job, such as consulting or public speaking. It could also be reported by those who make most of their income from partnerships, such as law firms and medical practices. And it could include investors who have little involvement in the day-to-day operations of a company. [PolitiFact.com, 7/25/10, emphasis added]
MYTH: Tax Cuts Pay For Themselves
FACT: Extending tax cuts for the wealthy would cost over $700 Billion
New York Times: Extending Tax Cuts For The Rich Would Cost $700 Billion. According to the New York Times: "Most of the tax cuts that were a signature domestic initiative of George W. Bush's presidency carried an expiration date of Dec. 31, 2010, to limit the potential revenue losses; supporters assumed that they would be extended when the time came. Extending them for the next 10 years would add about $3.8 trillion to a growing national debt that is already the largest since World War II. About $700 billion of that reflects the projected costs of tax cuts for those in the top 2 percent of income-earners." [New York Times, 8/10/10]
FACT: Extending ALL of the Bush tax cuts would cost over $3 trillion
Pew: Extending Bush Tax Cuts Would Cost $3.1 Trillion Over The Next 10 Years. According to the the Pew Economic Policy Group: "Making the tax cuts permanent for all taxpayers, regardless of income, would cost $3.1 trillion over the next 10 years and inflate the national debt to 82 percent of GDP. This would be the highest level since 1948, in the aftermath of World War II, and well above the average debt-to-GDP ratio of the last 50 years of 37 percent. The current ratio is about 57 percent." [Pew Economic Policy Group, May 2010]
FACT: The Bush tax cuts are the largest contributor to the deficit
CBPP: "Tax Cuts Have Been The Single Largest Contributor To The Reemergence Of Substantial Budget Deficits In Recent Years." According to the Center on Budget and Policy Priorities: "Congressional Budget Office data show that the tax cuts have been the single largest contributor to the reemergence of substantial budget deficits in recent years. Legislation enacted since 2001 added about $3.0 trillion to deficits between 2001 and 2007, with nearly half of this deterioration in the budget due to the tax cuts (about a third was due to increases in security spending, and about a sixth to increases in domestic spending)." [CBPP, accessed 1/31/10]
The Bush Tax Cuts Are The Primary Driver Of Federal Budget Deficits Over The Next Decade. Below is a chart from CBPP showing the deficit impacts of war spending, financial recovery spending, the recession itself, and the Bush tax cuts:
MYTH: Tax Cuts Increase Federal Government Revenues
FACT: Tax cuts REDUCE Revenues
CBO: The Bush Tax Cuts Reduced Revenue. According to the Congressional Budget Office: "The baseline envisions that major provisions of EGTRRA and JGTRRA-such as the introduction of the 10 percent tax bracket, increases in the child tax credit, repeal of the estate tax, and lower rates on capital gains and dividends-will expire as scheduled at the end of 2010. On balance, the tax provisions that are set to expire during the 2008-2017 period reduce revenues; thus, under a scenario in which they were extended, projected revenues would be lower than the amount in the current baseline." [Congressional Budget Office, January 2007]
CBO: "A Permanent Extension [Of Bush Tax Cuts] Would Entail Large Revenue Losses." According to the Congressional Budget Office: "A related option is to permanently eliminate the scheduled tax increases in EGTRRA and JGTRRA. A permanent extension would have a bigger effect on demand in 2011 than would a temporary extension, because households that expected higher after-tax income in subsequent years would spend a larger share of the additional income they receive in 2011. However, a permanent extension would entail large revenue losses after the recovery is over, so its effects on output and employment in the next few years per dollar of total budgetary cost would be much lower than those of the one-year deferral analyzed here." [Congressional Budget Office, 2/23/10]
President Bush's OMB Director Admitted Tax Cuts Cut Government Revenue. As reported by the Washington Times, "In an interview with editors and reporters at The Washington Times, [OMB Director] Mr. [Rob] Portman and Council of Economic Advisers Chairman Ed Lazear made a pitch for extending the personal and investment tax cuts, which they believe spurred growth in the economy and stock market. But they conceded that the tax cuts have not prompted more people to get work and contribute to the economy, while they cut deeply into government revenue and contributed to record budget deficits that have not shown much improvement until recently." [Washington Times, 10/4/06]
MYTH: Democrats Are Supporting The Largest Tax Increase In History
FACT: Republicans wrote tax cuts to expire in 2010 in order to hide their true cost
Time: Congress Wrote Tax Law To Expire After 2010 Because It Made Cuts Appear Cheaper. As Time reported in 2001:
Topping the list of odd features is the "sunset" provision that repeals the entire bill at the end of 2010. Budget rules require Congress to include a sunset clause in all major tax legislation, but this sunset arrives a year early--after 10 years instead of the 11 years covered by the current budget resolution. That year was shaved off to keep the total cost of the bill under $1.35 trillion. By repealing the legislation in the 10th year, Congress saved billions of dollars. Without the repeal and a few other tricks, the cost of the full 11-year plan would balloon to more than $1.8 trillion by the end of 2011, far exceeding anything the Democrats would vote for. And the cost in the second decade would reach as much as $4 trillion. Even some conservatives on Capitol Hill are dismayed by the apparent dishonesty of the early sunset. After both parties agreed to a smaller tax cut, the conference committee pulled a fast one. [Time, 6/3/01, emphasis added]
American Enterprise Institute: Reconciliation "Ploy" To Pass Bush Tax Cuts Means They Expire After 10 Years. According to Norman Ornstein, resident scholar at AEI:
It is worth repeating why we are in this particular car heading toward the cliff. When the Bush tax cuts were on the agenda at the very beginning of his presidency, Republicans in Congress and the White House made a tactical choice to avoid giving Senate Democrats the leverage that a 60-vote hurdle can provide by employing reconciliation (yes, the same tool that those who applied it then condemned roundly when it was used for health care reform this year). It was tricky to use reconciliation for tax cuts, which increased deficits when reconciliation was specifically supposed to be used for revenue-neutral or deficit-reducing programs. But the decision was made to use it for this purpose--but not to violate the proviso that the plan would increase deficits outside the budget window of 10 years.
That meant a ploy of declaring that all the tax cuts would expire entirely after 10 years, including the absurd-on-its-face provision that estate taxes would gradually decline to zero in 2010--and then be fully restored in 2011. From the day after the tax cuts were signed into law, Republicans were campaigning to extend them, in effect admitting that the policy was built around a "never mind" ruse. To be fair, there were plenty of ruses in the health care reform reconciliation, so it is not as if one party is clean--this is legislative politics. But the charges now emanating from Republicans that the Democrats are going to be responsible for a huge tax hike is, shall we say, bemusing. [AEI.org, 7/21/10, emphasis added]
Ezra Klein: Reconciliation Maneuver Meant "Twisting A Budget Process Meant To Reduce The Deficit." According to the Washington Post's Ezra Klein:
In order to maximize the size of the cuts, Republicans had to minimize the influence of minority Democrats on the package. So they chose to run the bill through the reconciliation process. But that posed some challenges. Budget reconciliation had never been used to increase the deficit. In fact, it specifically existed to decrease the deficit. That's why one of its rules was that you couldn't use it to increase the deficit outside the budget window. Republicans realized they could take that very literally: The budget window was 10 years. So if the tax cuts expired after 10 years, they wouldn't increase the deficit outside the budget window. They'd also have the added benefit of appearing less costly in the Congressional Budget Office's estimates, as the CBO duly scored them as expiring after 10 years, which kept the long-range budget picture from exploding.
But the plan was never to have the tax cuts expire. Instead, the idea was that people would get used to the new tax rates, and no future Congress would want to allow a big tax increase, so when the time came, either Republicans in office would extend the cuts or Republicans in the minority would hammer Democrats until they extended them. And that's where we are now: Democrats control the government, so Republicans are screaming about tax increases as a way to get Democrats to extend tax cuts.
It's really hard to know where to start with this one. It's not a tax increase passed into law by Democrats. It's a reversion to old tax rates passed into law by Republicans. It's not how law is supposed to work. It's the result of twisting a budget process meant to reduce the deficit so you could use it to massively increase the deficit. [Washington Post, 7/19/10, emphasis added]
MYTH: Taxes Are High
FACT: Historically, taxes are near their lowest
GOP Rep. McHenry: "Marginal Tax Rates Are The Lowest They've Been In Generations, And All We Can Talk About Is Tax Cuts." As reported by Time Magazine, North Carolina Republican Patrick McHenry said: "Marginal tax rates are the lowest they've been in generations, and all we can talk about is tax cuts... The people's desires have changed, but we're still stuck in our old issue set." [Time Magazine, 5/7/09]
Top Tax Brackets Over Time:
35% in 2010: Currently, The Highest Tax Rate is 35%. According to The Tax Foundation, the 2010 tax rate for couples making over $373,650 annually is 35%. [Tax Foundation, accessed 9/20/10]
- 39.1% in 2001: The Highest Tax Rate was 39.1% in 2001. According to The Tax Foundation, the 2001 tax rate for couples making over $297,350 annually was 39.1%. [Tax Foundation, accessed 4/14/09]
- 50% in 1986: Highest Tax Rate was 50% in 1986. According to The Tax Foundation, the 1986 tax rate for couples making over $175,250 annually was 50%. [Tax Foundation, accessed 4/14/09]
- 70% in 1981: The Highest Tax Rate was 70% in 1981. According to The Tax Foundation, the 1981 tax rate for couples making over $215,400 annually was 70%. [Tax Foundation, accessed 4/14/09]
- 77% in 1964: The Highest Tax Rate was 77% in 1964. According to The Tax Foundation, the 1964 tax rate for couples making over $400,000 annually was 77%. [Tax Foundation, accessed 4/14/09]
- 91% in 1963: The Highest Tax Rate was 91% in 1963. According to The Tax Foundation, the 1961 tax rate for couples making over $400,000 annually was 91%. [Tax Foundation, accessed 4/14/09]
The Last President To Serve While The Highest Tax Bracket Below 35%: Herbert Hoover. Herbert Hoover was the last president to serve while the nation's highest tax rate was below the 2009 rate, 35%. In 1931, during his tenure, those earning over $100,000 were taxed at 25%. [Tax Foundation, accessed 4/14/08]
MYTH: Americans Don't Want Tax Cuts For The Rich To Expire
FACT: An overwhelming majority of Americans favor allowing the tax cuts for the wealthy to expire
Gallup Poll: 59% Of Americans Favor Ending Tax Cuts For Those Making Over $250,000. According to a September 2010 Gallup poll: "A majority of Americans favor letting the tax cuts enacted during the Bush administration expire for the wealthy. While 37% support keeping the tax cuts for all Americans, 44% want them extended only for those making less than $250,000 and 15% think they should expire for all taxpayers." [Gallup, 9/10/10]
CNN Poll: 69% Of Americans Favor Ending Tax Cuts For Those Making Over $250,000. A CNN poll in late August found that a majority, 51 percent, favors President Obama's plan to extend tax cuts for the middle class while allowing the tax cuts for those making over $250,000 per year to expire. Eighteen percent believe all of the tax cuts should expire. [CNN, 8/20/10]
CBS Poll: 56% Of Americans Favor Ending Tax Cuts For Those Making Over $250,000. According to CBS News: "The tax cuts enacted under President George W. Bush are set to expire at the end of the year, and Democrats and Republicans will spar this fall over whether to extend them for all Americans, or to allow the tax cuts to expire for the richest Americans. A new CBS News poll finds that a majority of Americans, 56 percent, say the tax cuts should expire for households earning over $250,000 per year, as Democrats have proposed. Thirty-six percent of Americans say they should not be allowed to expire." [CBS News, 8/26/10]
National Journal Poll: 57% Of Americans Favor Ending Tax Cuts For Those Making Over $250,000. As reported by the Washington Post, a new National Journal poll found that "[t]wenty nine percent support ending only the tax cuts for the rich, and 28 percent ending all the tax cuts -- meaning a total of 57 percent support letting the tax cuts for the rich expire. Only 29 percent, or less than a third, support the GOP position of keeping all the tax cuts in place. Support also runs strong among independents, with 28 percent supporting ending the tax cuts for the rich, and 31 percent supporting an end to them all -- a total of 59 percent." [Washington Post, 9/14/10, emphasis added]