In the presidential campaign, Barack Obama promised he’d cut taxes for 95 percent of all Americans. And, so far at least, it looks like he’s coming close to meeting that goal. I think this sort of largess is a mistake given the nation’s long-run fiscal problems. But GOP claims that Obama is trying to raise taxes for many Americans are bogus.
TPC has just completed a major analysis of the tax provisions of the President’s 2010 budget. We found that, compared to current law, 91 percent of taxpayers would get a tax cut under the Obama plan. That is, they’d pay less tax than they would if the Bush tax cuts expired as scheduled in 2010 and the Alternative Minimum Tax is allowed to bite millions more taxpayers.
Keep in mind that this is not economic stimulus. Many of these proposals would not kick in until 2011, long after the recession ends (I hope). As a result, TPC looked at their impact in 2012, when all the changes are fully phased in.
Obama prefers to measure the impact of his proposals by assuming most Bush tax cuts will never expire, and the AMT will continue to be patched. By that score, Obama’s budget would do pretty much what he promised, and reduce taxes for about 86 percent of us.
The Obama budget would cap the value of itemized deductions at 28 percent, restore the pre-2001 top tax rates of 36 percent and 39.6 percent on ordinary income, and tax capital gains at a top rate of 20 percent. At the same time, it would permanently index the AMT (which would limit its reach), and extend a number of “temporary tax cuts” that were enacted last month as part of his stimulus plan, including the Making Work Pay credit.
Here’s the bottom line: Many of the highest earners—those who benefited most from the Bush tax cuts—would see their taxes increase, although many would still pay an average effective tax rate that is lower than under the pre-2001 law. Everyone else, on average, would get a tax cut.
Here are the numbers compared to current law (the way I prefer to do it): The lowest earners would see their after-tax income rise by an average of 5.2 percent, or about $580. Those in the middle, who make between $38,000 and $67,000, would get an average tax cut of 3.8 percent, or about $1,670. Even those in the top 5 percent of earners, who make more than $224,000, would get an average tax cut of 3 percent, or nearly $7,500. That’s because Obama believes that no one making less than $250,000 should get a tax hike. Even the top 1 percent of earners, who make more than a half-a-million dollars, would break even. Only those making $2.7 million or more (the top 0.1 percent) would see their after-tax income fall—by an average of 0.1 percent or $2,400. And even 40 percent of them would get a tax cut.
A few caveats: Because Obama has not fully described many of his proposals, TPC had to make some educated guesses about what he wants to do. For instance, he says he’d restore the 36 percent and 39.6 percent rates for couples earning more than $250,000. But he doesn’t define “earning,” so we figured he means adjusted gross income.
I don’t believe that tax cuts such as this are sustainable for very long. But like them or not, Obama is trying to do what he promised.