The Center's work on '2001/2003 Tax Cuts' Issues


Chairman Ryan’s Misleading Chart

March 27, 2012 at 4:59 pm

House Budget Committee Chairman Paul Ryan recently summarized his new tax proposal this way:

[W]e’re saying get rid of all the special interest loopholes and tax shelters that are disproportionately used by those higher income earners, get rid of those tax shelters, so you can lower tax rates for everybody, and make us better wired for economic growth and job creation.

Chairman Ryan has also said that most tax-expenditure benefits go to high-income people.

The lead tax chart in Chairman Ryan’s budget document seems to support his statement, suggesting that the tax code includes a series of egregious loopholes (or “tax expenditures”) that mostly flow to very rich individuals.  It gives the impression that we can easily eliminate tax expenditures for the very wealthy and thereby pay for lower rates for all taxpayers — including the Ryan plan’s big reduction, to 25 percent, in the top income tax rate.

Who Benefits From Tax Loopholes

The chart in question is based on data from the Urban-Brookings Tax Policy Center (TPC).  But it does not show what Chairman Ryan suggests it does, for two key reasons.

First, the chart shows tax-expenditure benefits per person.  There obviously are far fewer people in the top 1 percent of the population than in the other income groups shown, each of which consists of 20 percent of the population.  So, the top 1 percent receives a much smaller share of the total benefits of tax expenditures — and the other income groups receive much larger shares —than a quick look at this graph might lead you to think.

Second, the graph covers all tax expenditures, including the preferential tax rate for capital gains and dividends.  Fully 75 percent of the benefits of that tax expenditure flow to the top 1 percent of people.  But Chairman Ryan’s budget essentially rules out raising the low capital gains and dividend tax rate.

The long document that Ryan issued on March 20 presenting his budget takes President Obama to task for proposing to let the capital gains rate on high-income households return to the 20 percent level at which it stood before the Bush 2003 tax cuts (as compared to today’s 15 percent rate) and declares, “Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy.”

Once you take the capital gains and dividends preference off the table, the benefits of the remaining tax expenditures are fairly evenly distributed across income groups, as the next graph shows.  This is a very different picture than that which Chairman Ryan’s graph seems to depict.

Curbing Tax Expenditures Would Affect All Income Groups

The biggest of these tax expenditures are the mortgage interest deduction and the exclusion for employer-provided health insurance.  Both are ripe for progressive reform; for example, why should the government subsidize mortgage interest at a 35 percent rate for a wealthy banker but at a 15 percent rate for a middle-income welder?   But, neither fits Chairman Ryan’s description of “special interest loopholes and tax shelters that are disproportionately used by those higher income earners.”  Elimination of the exclusion for employer-provided health insurance, for example, would hit the middle class harder than very high-income people.

Also keep in mind that the Ryan budget would use the revenue from reducing tax expenditures not to reduce our unsustainable long-term deficits but to help finance a cut in tax rates that would disproportionately benefit the wealthiest people in the country.   TPC estimates that the rate cuts (and other Ryan tax reductions) would raise after-tax incomes by 12.5 percent among people making more than $1 million a year — providing them an average annual tax cut of $265,000, on top of an average annual tax cut of $129,000 from making the Bush tax cuts permanent — but by just 1.9 percent among middle-income households.

The Ryan budget thus would lower the taxes of the nation’s most affluent people even if that means failing to contribute to deficit reduction and/or shifting tax burdens to middle- and lower-income families.

The Massive Hidden Safety-Net Cuts in Chairman Ryan’s Budget

March 21, 2012 at 4:44 pm

A key misunderstood element of House Budget Committee Chairman Paul Ryan’s budget plan is his proposed cut in spending for “other mandatory” programs  — non-discretionary programs other than Social Security, Medicare, Medicaid, and other health programs.  His plan shows almost $1.9 trillion in cuts in such programs over the next ten years compared to what President Obama’s budget proposed for such programs.  His plan does not provide any details about specific program cuts that would add up to that very large amount, although Chairman Ryan reportedly indicated that he would get a significant portion of the savings from not accepting various policies that the President proposed.

But any notion that you could get most of the $1.9 trillion in savings in this category simply by rejecting the President’s proposals for new spending would be mistaken.  In fact, the Ryan plan proposes to cut spending for non-health mandatory programs by $1.2 trillion below the spending projected for these programs under current policies.

Moreover, you cannot achieve those savings without making very deep cuts in the crucial safety-net programs in this category, such as SNAP (formerly known as food stamps), Supplemental Security Income for the elderly and disabled poor, Temporary Assistance for Needy Families, the school lunch and other child nutrition programs, and unemployment insurance.

At today’s House Budget Committee markup, Chairman Ryan’s staff indicated that his plan assumes a $133 billion cut in SNAP over the next ten years.  In a document outlining his plan — The Path to Prosperity — and in response to press questions, Chairman Ryan also suggested that cuts in farm programs and changes in federal employee retirement could contribute to the required savings (although he provided no details about the policies that he assumed or the savings they would achieve).  But these two areas could likely provide only a relatively modest amount of savings.  Total projected spending for farm programs over the next ten years is $165 billion.  While we have long supported substantial cuts in farm programs, cutting more than a modest portion of the projected spending for those programs isn’t politically feasible.  (The Bowles-Simpson commission seemed to agree; it proposed significant cuts in Social Security, Medicare, defense, and many other programs, but to cut farm programs by only $10 billion over ten years.)

The federal employee retirement program is more politically vulnerable — Bowles-Simpson recommended $93 billion in savings from changes in federal civilian and military retirement (most of which would come in the form of an increase in revenues, although Bowles-Simpson displayed the savings as a cut in mandatory spending, which Chairman Ryan presumably is assuming as well).   Assuming about $100 billion in savings from federal retirement programs, $133 billion in savings from SNAP, and $50 billion in savings from farm programs (five times what was acceptable to Bowles-Simpson commission members), an additional $900 billion in savings under the Ryan plan would have to come from non-health mandatory programs.

Of the $900 billion, a very small amount could come from increases in fees or asset sales, but the bulk would have to come from the safety-net programs that represent most of the remaining spending in this category.  Put simply, there is no way to generate the required savings without extremely severe cuts in these programs, on which the most vulnerable Americans depend.  Cutting these programs sharply would be an appalling idea — particularly while the wealthiest Americans would get big tax cuts — but House passage of a budget that requires these cuts without a full and honest debate about them, and without leveling with policymakers and the public about what cuts the Ryan budget envisions in these programs, would be a real travesty.

Greenstein on the Ryan Budget

March 21, 2012 at 11:17 am

We’ve issued a statement from Robert Greenstein on the budget from House Budget Committee Chairman Paul Ryan.  Here’s the opening:

The new Ryan budget is a remarkable document — one that, for most of the past half-century, would have been outside the bounds of mainstream discussion due to its extreme nature.  In essence, this budget is Robin Hood in reverse — on steroids.  It would likely produce the largest redistribution of income from the bottom to the top in modern U.S. history and likely increase poverty and inequality more than any other budget in recent times (and possibly in the nation’s history).  It also would stand a core principle of the Bowles-Simpson fiscal commission’s report on its head — that policymakers should reduce the deficit in a way that does not increase poverty or widen inequality.

Click here for the full statement.

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Senator Toomey’s Tax Plan Can’t Do Everything That He Says It Does

February 16, 2012 at 3:12 pm

Senator Pat Toomey (R-PA) pounced on CNN’s Soledad O’Brien this week when she raised findings from an analysis that CBPP issued last fall of the tax plan that the Senator proposed to the congressional “Supercommittee.”  Senator Toomey asserted that a finding that O’Brien cited — that his tax plan would raise taxes on people making less than $200,000 — was “factually wrong and ridiculous.”

Really?  Let’s take a look:

In presenting his plan to the Supercommittee, Senator Toomey indicated it would:

  • Cut tax rates below the levels of President Bush’s tax cuts, setting the top rate for high-income households at just 28 percent;
  • Limit “tax expenditures” (credits, deductions, and other tax preferences) using a model developed by leading economist Martin Feldstein;
  • Leave the current preferential tax rate for capital gains in place; and
  • Produce $290 billion in increased revenues for deficit reduction.

It is impossible to do all of these things without raising taxes on people below $200,000.  Consider:

  • The Urban Institute-Brookings Institution Tax Policy Center (TPC) has estimated that the reductions in tax rates that Senator Toomey proposed would cost $268 billion in 2015 alone, with $137 billion of it going to people over $200,000. (These estimates assume a corresponding reduction in the tax rate under the alternative minimum tax, or AMT.  If policymakers do not enact that corresponding reduction, the number of taxpayers subject to the AMT would double to more than 13 million — a result that Senator Toomey surely does not intend.)
  • TPC also has estimated that a Feldstein-like tax-expenditure limit on people making over $250,000 would raise only $48 billion in 2015, meaning that higher-income households would receive a large net tax cut — they would gain much more from the tax-rate reductions than they would lose from the tax-expenditure limit.  (TPC did not provide this estimate for people over $200,000, but the TPC figures make clear that those over $200,000 would receive a substantial net tax reduction.)

The math is irrefutable.  Senator Toomey told O’Brien that, while reducing their deductions and credits, he also would cut tax rates for people below $200,000 so that they would face no net tax increase.  But that can’t be.  If the tax plan is supposed to produce a net increase in revenues, and if it loses revenue from people making over $200,000, then it simply must raise revenue from people making less than $200,000.

Nor would that outcome be terribly surprising.  With regard to tax expenditures, the Toomey plan shields the most lucrative tax expenditure for high-income people — the preferential tax rate on capital gains — while limiting key tax expenditures that lower- and middle-income people use, such as the child tax credit and employer-provided health insurance.  Indeed, Feldstein’s own estimates show that nearly three-fifths (71 percent) of the revenue that his proposal to limit tax expenditures — the model for the Toomey plan — would produce would come from people with incomes under $200,000.

Moreover, the Joint Committee for Taxation (JCT), Congress’ official, impartial “scorekeeper” on tax legislation, examined a plan similar to Senator Toomey’s — one that would cut tax rates to about one-seventh below the Bush tax rates, setting the top rate at 30 percent (Senator Toomey’s top rate is 28 percent), fully offset the costs of cutting tax rates by reducing tax expenditures (the Toomey plan would go further and limit tax expenditures enough to produce $290 billion in net revenue increases for deficit reduction), and retain the current preferential tax rates for capital gains and dividends (as the Toomey plan would do).  JCT found people making more than $200,000 would receive large tax cuts while those making less than $200,000 would, on average, face tax increases.

The only way that Senator Toomey’s plan could avoid raising taxes on people with incomes below $200,000 would be if he designed it in such a way that it lost significant revenue overall and, thus, added significantly to the deficit.  Given its tax cuts for people at high income levels, it must either raise taxes on middle-income families or increase the deficit.  It cannot achieve the conflicting goals that Senator Toomey claims for it.

That would become evident if Senator Toomey turned his proposal, which is still not available on paper, into a specific plan and sent it to JCT for analysis.

Bernstein on Income Inequality

February 9, 2012 at 2:21 pm

Testifying at a Senate Budget Committee hearing today on “Assessing Inequality, Mobility, and Opportunity,” CBPP Senior Fellow Jared Bernstein explained that, “even with recent improvements in the job market, the American economy still faces significant challenges, particularly the historically high levels of income and wealth inequality, the squeeze on middle-class incomes, and elevated rates of poverty.”  Below are the main findings of his testimony:

  • It is important to examine trends in income inequality through the lenses of various different data sources, as each has its own strengths and limitations. The fact that all of these series show similar trends toward increased dispersion of incomes is itself good evidence of the validity of their findings.
  • A key factor driving the ups and downs in the inequality trend in recent decades is capital incomes, particularly capital gains; the fact that such income is given preferential treatment in our tax code relative to ordinary income from wages is thus a relevant issue for both inequality and tax reform.
  • Some analysts and policy makers cite income mobility — movements by persons and families up and down the income scale over the course of their lifetimes, or from one generation to the next — as a reason why policy makers should be less concerned about historically high levels of inequality. However, a key finding here is that the rate of income mobility has not accelerated in recent decades; if anything, it may have slowed. Therefore, it is incorrect to argue that income mobility has offset the greater distance between income classes over time — i.e., higher inequality. It is also notable that there is considerably less mobility in the US than in most other advanced economies, including those with far lower levels of income inequality.
  • These findings suggest a negative feedback loop wherein higher inequality is blocking key opportunities, such as educational attainment, that would in turn reduce inequality and enhance mobility.
  • The potential interactions between our major economic and fiscal challenges remain a challenge for policy makers. Along with inequality, there is the related squeeze on low- and middle-class incomes, high rates of poverty, and the high, though declining, rate of unemployment. And, of course, a central concern of this committee is our bleak fiscal outlook. Addressing one of these problems could potentially exacerbate another.

Income Gains at the Top Dwarf Those of Low- and Middle Income Households

For example, recent Congressional Budget Office analysis predicts that full and sudden expiration of the 2001 and 2003 tax cuts in 2013 would push unemployment higher.  Similarly, cuts to programs that are supporting low and moderate income families, like nutritional assistance, the Earned Income Tax Credit, or the Child Tax Credit, could worsen poverty and inequality.  This worsening would further exacerbate inequality if we were to then turn around and use some of these savings to lower taxes on the wealthiest households.

While this may sound fanciful, it is not. In fact, the 2011 budget proposed by House Republicans does precisely this. As analysis from the Center on Budget and Policy Priorities shows, almost two-thirds of that budget’s spending cuts over ten years — $2.9 trillion —come from programs targeted at households with low and moderate incomes. And those budget savings are used to support tax cuts for the wealthiest households.

With this in mind, a central question of this testimony is how policymakers can address these three problems — inequality, economic slack, and the fiscal path — without solving one problem at the expense of exacerbating another problem. Most pointedly, revenue and spending policies designed to put the nation on a sustainable budget path must not exacerbate inequality, poverty, or the ongoing middle-class squeeze.

Click here for the full testimony.