Obama: Tax Cutter or Tax Hiker?

A colleague asked me whether Obama actually supports tax cuts or tax hikes, as he had heard contradictory information in the media. The answer is that it depends on what you compare his proposed policies to–tax rules in place for 2008 or the official “baseline” of projected future revenues.

The official baseline assumes that all recent tax cuts (income tax cuts, capital gains tax cuts, and estate tax cuts) expire at the end of 2010. It also assumes that alternative minimum tax relief is not extended, with the results that 20 million households are handed a whopping tax hike compared to how much they currently pay.

Obama is proposing a tax increase compared to tax policy in place this year, but a tax cut compared to the official baseline.  You can get the details in this analysis by the Urban/Brookings Tax Policy Center (see page 28).

My view is that the official baseline is a silly starting point for tax comparisons. For one reason, hardly any fiscal experts think that Congress won’t extent current AMT relief.

More importantly, the true tax “baseline” for the tens of millions of U.S. taxpaying families is how much they currently pay. If current tax cuts expire, they will have less to spend on their own priorities–such as food, housing, and gasoline–because they will have to send more cash to the government. If Obama wins the election and puts his policies into place, Americans would pay higher federal taxes than they do today.

But more important than the additional revenue that would be collected under a President Obama are the two main features of his tax approach:

1. Obama would increase marginal tax rates on wages, interest, dividends, capital gains, small business profits, and estates. Increasing marginal rates is the single most damaging way to raise taxes.

2. Obama would introduce a slew of new targeted tax credits that would distort the economy, treat Americans unequally, and increase Washington’s micromanagement of the economy. Further, many of his proposed special tax breaks would be refundable, meaning that they are actually spending increases and not tax cuts.