TAXES AND THE ELECTION October 2012 Len Burman Syracuse University

Policy Context Expiration of Bush Tax Cuts and Temporary Stimulus Measures (The fiscal cliff) Weak economy Tax revenues at lowest level since Truman Administration Tax code is complex, unfair, and inefficient Corporate tax rates high and base is porous Rising economic inequality Existential threat created by the “lucky duckies”

The Bush-Obama Tax Cuts Rates cut: top rate from 39.6% to 35%; new 10% bracket Repealed PEP and Pease Marriage penalty relief $1,000 child credit/larger dependent credit Estate tax repeal in % rate on capital gains/dividends Higher IRA/pension limits Saver’s credit Education incentives AMT patches

+Stimulus Tax Cuts American Opportunity Tax Credit Larger EITC for 3+ kids Payroll tax cut Temporary business tax breaks [R&E credit and other “extenders”]

It all turns back into a pumpkin at the end of 2012

Historical Outlays and Receipts

Deficit Projections, , in $billions Baseline Obama Budget Including Effect of Budget Proposals

Ratio of Workers to Retirees 9

Primary Spending as % of GDP, with and without Excess Health Costs,

Combined Federal, State, and Local Corporate Tax Rate in OECD Countries,

What is the AMT? 13

Value and Number of Tax Expenditures

10 Largest Tax Expenditures, FY2013 In Billions of Dollars ProvisionAmount 1Exclusion for employer-sponsored health insurance Mortgage interest deduction (k) plans72.7 4Lower rate on capital gains62.0 5EITC55.7 6Pensions52.3 7State and local tax deduction (excluding property tax)46.3 8Tax deferral for multi-nationals41.8 9Child tax credit Charity deduction (other than education, health)39.8 Source: US Budget, Analytical Perspectives, FY2013, and author’s calculations Note: Health insurance estimate includes $113.7 billion payroll tax expenditure; EITC and child tax credit include outlays of $52.6 and $22.4 billion, respectively

Inequality is Growing: Income Shares of Top 1% and Top 0.1%,

Taxes and the Safety Net And the existential threat to our democracy created by the “lucky duckies” 18

Tax Credits Have Become an Important Part of the Social Safety Net 19 ProgramAmount in 2009, $Billions Medicaid392 SSI47 TANF29 SNAP55 Housing41 EITC49 CTC44 Source: Jim Ziliak, “Recent Developments in Antipoverty Policies in the United States,” IRP , 2011; and Budget of the United States, Analytical Perspectives, FY2011. Note: Tax credits include effect on both outlays and receipts.

Real Federal Spending on EITC, CTC and Welfare:

Effect of Various Components on Poverty Rate For Kids and All Households, in Percent, 2010 Note: Poverty rate is the “supplemental poverty measure.”

22

Mitt Romney and the “47Percent” “There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that's an entitlement. And the government should give it to them. And they will vote for this president no matter what…These are people who pay no income tax.” -- Mitt Romney, May 17, 2012, Boca Raton, FL

WSJ: “Lucky Duckies” “Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education. When these escape hatches are figured against income, the result is either a zero liability or a liability that represents a tiny percentage of income. The 1986 tax reform, for example, with its giant increase in the personal exemption and standard deduction, took six to seven million people off the tax rolls. “This complicated system of progressivity and targeted rewards is creating a nation of two different tax-paying classes: those who pay a lot and those who pay very little. And as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.” Source: “The Non-Taxpaying Class” (editorial), Wall Street Journal, November 20, 2002.

Who are the Lucky Duckies? Households who don’t pay income tax, 2011

Some Statistics About Households that Pay Neither Income Nor Payroll Tax More than half are elderly Over one-third are nonelderly with income under $20,000 Only about 1 in 20 is nonelderly with income over $20,000 Source: Tax Policy Center

Income and Payroll Tax as Percent of Income by Income Group, 2011

Percentage of Taxpayers Who Pay More Payroll Tax than Income Tax, by Income Group, 2011 Note: Chart shows statistics for tax units that pay at least some income or payroll tax. Thus, it excludes most elderly households. Payroll tax includes only employee share.

Solution More tax cuts? Especially for the rich? Or… the “Buffett Rule?” And new AMT for multinationals? Welcome to campaign 2012!

President Obama’s Tax Plan Extend most Bush tax cuts Top two rates revert to 36% and 39.6% Restore PEP and Pease Gains and dividends taxed at 20% Limit the value of itemized deductions to 28% Index the AMT Tax carried interest Buffett Rule

Obama (continued) Extend AOTC Extend and increase CDCTC Extend EITC increase for 3+ kids Restore Estate and gift tax to 2009 levels

Obama (continued) Reduce the corporate income tax rate from 35% to 28% 25% for Manufacturing Eliminate tax loopholes and subsidies Establish a new minimum tax on foreign earnings Expand, simplify, and make permanent the R & E Tax Credit Allow small businesses to expense up to $1 million in investments Double the deduction for start-up costs

Mitt Romney’s Tax Plan Make permanent the tax cuts Cut all individual income tax rates 20% 35% becomes 28%; 10% becomes 8% Repeal the estate tax and the AMT Keep gift tax with a max rate of 35% Eliminate investment income taxation for low- and middle- income taxpayers Allow the 2009 stimulus act tax provisions to expire Pay for by eliminating tax expenditures and economic growth

Romney (continued) Reduce top corporate income tax rate from 35% to 25% Make the research and experimentation credit permanent Extend expensing of capital expenditures for one year Grant a “tax holiday” for repatriation of corporate profits of foreign subsidiaries Implement a territorial system