President-elect Obama has made a slew of tax promises. Some of them are tax increases, some of them are tax cuts, and many of them are actually spending increases. Let's try to sort them out.
Here I classify tax changes in comparison with the taxes that Americans are paying this year. I am mainly working from this excellent Urban/Brookings study.
Note that many of Obama's proposed tax breaks are "refundable," meaning that much of the effect is to increase federal spending, not to cut taxes. Refundable tax breaks involve cash hand-outs to many people who do not pay any federal income taxes.
With that in mind, here are Obama's main proposals to change the tax system from its 2008 structure:
- Raise the top two personal income tax rates from 33 and 35% to 36 and 39.6%, respectively.
- Restore the income phase-outs for personal exemptions and itemized deductions, further increasing effective tax rates at the top end.
- Raise the top capital gains tax rate from 15 to 20%.
- Raise the top dividends tax rate from 15 to 20%.
- Increase taxes on oil and gas companies.
- Increase taxes on U.S. multinational companies.
Combined Spending Increases / Tax Cuts
- Making Work Pay. A refundable tax credit of up to $500 for low-income workers.
- Mortgage Credit. A refundable tax credit of up to $800 for nonitemizers who own homes.
- Saver's Credit. A refundable tax credit of up to $500 per family for retirement saving.
- American Opportunity Credit. A refundable tax credit of up to $4,000 for education expenses.
- EITC Expansion. Expand the refundable earned income tax credit.
- Child Care Credit. Turn the current child care credit into a refundable credit.
The Urban/Brookings analysis (pages 22 and 25) found that more than half of the dollar impact of these six tax code changes will be to increase federal spending, not to cut taxes. That's $648 billion more in federal spending over the next ten years. In addition, Obama is proposing a new refundable tax credit for buying health insurance.
- Exempt people age 65 and over from federal income tax if they earn less than $50,000.
- Minor business incentives. These promises were so small and undefined that the Urban/Brookings study didn't even score them.
As you can see, it was genius of Obama to successfully run for the White House as tax cutter, given that most of his proposed tax code changes are tax or spending increases. Part of the problem is that the media keeps calling Obama's proposals "middle-class tax cuts," as on the front of the Washington Post today.
For the economy, for tax code complexity, and for the America ideal of equal treatment under law, Obama's tax proposals would be a disaster. With Obama's tax and spending proposals, government as Santa Claus has reached new heights.
For other posts on Obama's tax plans, see: