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Counter-rotating Tax Spin

Does the Democratic budget contain the "largest tax increase in American history" or "not one penny" of increase? Answer: neither.


Summary

The Democrats’ proposed 2008 budget is being spun by both sides. Democrats claim it will not raise taxes by even a penny, while Republicans say it will impose the largest or second-largest tax increase in history.

Obviously, the budget can’t be the largest tax increase in history and zero tax increase simultaneously. So which is it? The answer depends on a couple of questions: What constitutes an increase? And an increase compared with what?

The budget does not propose a new tax hike, compared with current law. It would, however, allow many of President Bush’s tax cuts to expire, meaning some Americans will pay more compared with what they pay now. We suspect that those affected will see that as a tax increase, contrary to the Democratic spin. But the Republican claim that it would be “the largest in history” is off base, too. Measured by the yardstick most economists favor, it’s not even in the top 10.

Analysis

The spin surrounding the Democrats’ proposed budget brought to mind a classic optical illusion in which the same picture could be seen as either a duck or a rabbit. One side of the aisle saw an aggressive tax-increasing duck; the other saw a benevolent budget-balancing bunny. 

Counter-rotating Spin
 
Here is how the Democratic budget was being spun on the House floor, before it passed by a narrow margin in the House on May 17:

Democratic Rep. John Spratt, South Carolina: Lacking any other arguments, our friends from across the aisle, our Republican adversaries, will claim that this budget resolution raises taxes, as they have repeatedly and wrongly. Let me answer that claim emphatically. This budget does not raise taxes by one penny. Period. Not by one penny.

Republican Rep. Adam Putnam, Florida: The Democratic budget that we will vote on this evening raises taxes. And if you don’t believe it, just wait until your tax bill comes due in a couple of years when you are asked to pay more than you are today. And you will be asked to pay the largest tax increase in American history.

We should note at the start that no budget resolution raises or lowers taxes by itself, but only makes recommendations and sets priorities. Specific tax legislation is the domain of the tax-writing panels, the House Ways and Means Committee and the Senate Finance Committee, and they will have to take up any proposal before it makes its way through Congress.

The Democrats are correct in saying that their budget does not envision any tax increases – compared with current law. However, Bush’s tax cuts include a “sunset provision” stipulating that they expire after a set time period. The major 2001 and 2003 tax reductions are set to expire in 2011. If the Democrats take no action, taxes automatically revert to pre-2001 levels. It’s a question philosophy majors could spend hours discussing: If you fail to prevent something, are you therefore causing it? It is worth noting that the sunset provisions were devised by Republicans who wanted to make their 2001 and 2003 cuts appear less expensive and who gambled that they would eventually be able to make them permanent.

The Democrats don’t plan to let all the tax cuts expire; the budget resolution recommends extending “middle-income tax relief,” including such things as making the $1,000 per child tax credit permanent (rather than allowing it to revert to a $500 credit), maintaining the 10 percent tax bracket for the lowest-income taxpayers (rather than allowing it to revert to 15 percent), and continuing "marriage penalty" relief for couples. The nonpartisan Tax Policy Center has calculated that extending these and some other “middle-income” provisions would be worth $700 billion over 10 years to taxpayers, compared with what would happen if the provisions expire on schedule. About two-thirds of the money would go to those with incomes under $100,000.

Republicans say that even with some proposed extensions, Americans will be paying $217 billion more in taxes over the first two years after the budget takes effect than they do currently. Some Republicans call this the largest, others say second-largest, increase ever levied. There is a lot of guesswork in that $217 billion figure, but even if it is accurate it would be the largest increase only as measured in 2007 dollars without any adjustment for inflation or rising incomes. As a percentage of the entire U.S. economy, the yardstick favored by most economists, this $217 billion two-year figure amounts to just 0.64 percent of the projected gross domestic product. That would be significant – the third-largest hike since 1968. But set against all tax increases enacted since 1940, it wouldn’t even make the top 10.

Even Democrats don’t agree on exactly what shape their tax legislation will take. The budget resolution puts both House and Senate on record as retaining some form of the federal estate tax, rather than repealing it permanently. But specific levels aren’t mentioned. The resolution also makes it House policy to provide “immediate relief” from the alternative minimum tax for “tens of millions” of taxpayers who otherwise would be subject to it, but there is no similar statement of policy for the Senate.

Nevertheless, it is clear enough that the Democratic budget resolution envisions higher taxes than at present, especially for the upper-income taxpayers who benefited most from the Bush cuts.

This isn’t the first time politicians have taken advantage of the complexity of budget and tax proposals to spin things their way. It most certainly won’t be the last.

— by Jessica Henig

Sources

Congressional Record. 17 May 2007: H5361-H5373.

Tax Policy Center. "Select Tax Cut Extensions." 8 February 2007.

United States House of Representatives and United States Senate.  S. Con. Ref. 21, Concurrent Resolution on the Budget for Fiscal Year 2008. 110th Congress, 1st Session. 17 May 2007.

Tempalski, Jerry. "Revenue Effects of Major Tax Bills."  OTA Working Paper 81, Office of Tax Analysis, U.S. Treasury Department. July 2003.