At the White House Monday President Barack Obama repeated his call for continuing the current tax rates for single people with income under $200,000 and married couples with incomes under $250,000, and for increasing tax rates on people above those thresholds.
Since the 2008 campaign Obama has been part of the prolonged debate over whether income tax policy ought to be rewound back to the Clinton Era. The current income tax rates have been in effect for nearly ten years and the House will vote in the next few weeks on whether to extend them for one more year. Millions of Americans working today have never known any other income tax rates. They are set to expire at the end of this year and revert to 2000 levels.
During a news conference at the White House, President Obama asked Congress to extend the current income tax rates for couples earning less than $250,000 per year, but raise taxes on those above $250,000.
“I’m not proposing anything radical here,” Obama said. Upper-income people should be required to “go back to the income tax rates we were paying under Bill Clinton.”
He added, “Republicans say they don’t want to raise taxes on the middle class; I don’t want to raise taxes on the middle class….Let’s agree to do what we agree on.”
If not “radical,” the president’s proposal Monday was also not new. In fact, he’s made the very same pitch in each of his budget proposals since 2008.
His repetitive stance has put Obama at cross purposes not only with Republicans but with some Democrats, such as Virginia Senate candidate Tim Kaine who wants to raise taxes only on those with incomes over $500,000.
As he did Monday, Obama has a habit of referring to these current tax rates as "tax cuts."
This labeling could make Obama’s audience think that the tax rates which were in effect prior to 2001 were somehow the "normal" or "permanent" income tax rates. They weren't. Congress had changed the income tax rates five times in the 20 years leading up to 2000, according to the nonpartisan Tax Policy Center in Washington.
Although nothing in tax law is truly permanent, if anything in the past few decades has the appearance of permanency, it is the current income tax rates.
Former Pennsylvania Gov. Ed Rendell and former Republican Party chairman Michael Steele join Andrea Mitchell to discuss President Obama's statement urging an extension of current tax rates for couples earning under $250,000 a year.
But the current rates are simply the ones that Congress and the president have chosen to allow to remain in effect -- or the ones that resulted from standoffs between Obama and congressional Republicans.
Obama himself summed up the history in his budget proposal earlier this year: in December 2010, congressional Republicans insisted on extending the current tax rates through 2012 “and threatened to allow taxes to increase on middle-class families if the Administration did not agree. Not extending the middle-class tax cuts would have hurt our nascent economic recovery, and would have imposed an enormous burden on working families….”
So Obama agreed to extend them to 2012 as part of a deal that also included a payroll tax cut and an extension of unemployment insurance benefits.
Obama said in his February budget proposal that he opposes the extension of the current tax rates on higher-income people and wants the return of the estate tax exemption and rates to 2009 levels. This would reduce the deficit by $968 billion over 10 years, the president’s budget officials estimate.
But what Obama didn’t say in his budget plan is that retaining the current tax rates for people with incomes under $200,000 and $250,000 for couples will come at a huge cost: according to the nonpartisan staff of the congressional Joint Committee on Taxation, the Treasury will lose nearly $1.4 trillion in revenue over ten years if those rates remain in effect.
Keeping the child tax credit would add another $267 billion in foregone revenue. This would all add to the future deficits and to government debt that younger Americans will need to pay off when they start working and paying taxes.
All this tax talk may refocus attention on the predicament which Congress and the president continue to find themselves in, pretty much as they did at the end of 2010.
No one disputes the fact that the U.S. economy is weak with 12.7 million people looking for work, 2.5 million needing work but having given up looking, and another 8.2 million working part time because their hours have been cut or because they can’t find a full-time job.
If the economy is this weak, and if there’s the danger a tax increase might, as Obama’s budget plan said “hurt our nascent economic recovery,” then how large a tax increase can the economy tolerate?
And is there a growing potential that “the economy is still too weak” argument will become a more or less permanent rationalization for not increasing tax rates on anyone at all?
To the latter question, the answer in the short term is clearly no: A major tax increase on people with incomes over $200,000 is going to take effect on New Year’s Day, as part of the Affordable Care Act: raising $20 billion in 2013, increasing to nearly $40 billion by 2019.
Republican presidential candidate Mitt Romney has called for not only extending the current income tax rates but cutting the top rate from 28 percent to 20 percent, while scrapping certain tax credit and preferences for higher-income people -- although he has not yet revealed which tax breaks he’d get rid of.
Wishing for better times, Democrats frequently invoke the late 1990s as the Golden Era of low unemployment, and budget surpluses. Obama did just that in his White House statement on Monday.
One of the lessons of the late 1990s is that many factors, including economic innovation and the development of new industries, caused higher tax revenues. As the Congressional Budget Office reported in 2000 and as current CBO chief Doug Elmendorf said in a 2001 research paper, this led to an increase in the share of income received by people in the highest tax brackets and a surge in capital gains from the soaring stock market.
The last major piece of tax legislation signed by President Bill Clinton, the Taxpayer Relief Act of 1997, created the child tax credit, lowered the estate tax, and cut the top capital gains tax rate from 28 percent to 20 percent – in other tax cuts for rich and for people with kids. It did, however, raise taxes on one group: cigarette smokers.