Testimony: Robert Greenstein on Tax Proposals in the President's Budget before the Senate Committee on Finance

PDF of this testimony (10pp.)

March 26, 2009

About the Speaker

I appreciate the invitation to appear before the Committee today. I am Robert Greenstein, Executive Director of the Center on Budget and Policy Priorities, a policy institute that focuses on fiscal policy issues and issues affecting low- and moderate-income families.

This testimony makes the following points:

  • As the Congressional Budget Office report issued last Friday shows, the nation faces serious mid-term and long-term fiscal problems. Strong action will be needed on both the revenue and spending sides of the budget.
  • It seems clear that the tax cuts enacted in 2001 and 2003 affecting people with incomes up to $250,000 will be made permanent, without their costs being offset. The major question regarding the 2001 and 2003 tax cuts concerns the disposition of the tax cuts for people making over $250,000 (over $200,000 for single filers).
  • Given the nation’s fiscal position, extending the upper-income tax cuts would be unwise for both the budget and the economy. Research suggests that extending these tax cuts without paying for them would likely reduce long-term economic growth because of the corrosive effects of the increased debt. This is a conclusion that emerges from the work of the Congressional Budget Office, the Joint Committee on Taxation, and other leading economists and fiscal policy experts.
  • President Obama’s tax proposals, which would allow some (but not all) tax cuts for households over $250,000 to expire at the end of 2010, have been criticized as producing a “high-tax” government and imposing crushing tax burdens on high-income Americans in general and on small business owners in particular. These criticisms do not withstand scrutiny.
  • Regarding the charge that these proposals would produce high levels of taxation, the Congressional Budget Office finds that under President Obama's proposals — including his proposal to cap itemized deductions at a 28% deduction rate for people making over $250,000 — total federal revenues would average 18.4% of GDP over the next ten years, just about the average level for the last 30 years, and would not exceed 18.9% of GDP in any year. These are not high levels of taxation. Indeed, there were only four years in the last 30 when the federal budget was balanced, and in every one of them, revenues were between 20% and 21% of GDP.
  • Nor would the Obama proposals result in crushing tax burdens on affluent Americans. Data from the respected Urban Institute-Brookings Institution Tax Policy Center show that average tax burdens on virtually every income group — including the top 1 percent of Americans — would be lower than they were in the 1990s, a period when the economy boomed. An often overlooked fact is that people at the top of the income scale would still gain from the extension of the 10 percent tax bracket, marriage penalty relief, reduction in tax rates in the tax brackets below the top two brackets, and the halving of the top tax rate on dividends from 39.6% in the 1990s to 20% under the Obama proposal. Indeed, high-income households would gain more on average than they would lose from the proposed itemized deduction cap, with the result that they would pay a smaller percentage of their income in federal taxes than under the pre-Bush policies. 
Effective Tax Rates
(average federal tax rate, 2012)

Household
Income Group

Current law with AMT
relief extended
(2001/03 tax cuts expire)

Obama
Proposal

Poorest fifth

 5.7%
0.8%

Next-to-bottom fifth

 2.5%
8.4%

Middle fifth

18.2%
15.2%

Next-to-top fifth

20.9%
18.1%

Top fifth          

27.7%
26.0%

Top 2 to 5 percent

26.9%
 25.3%

Top 1 percent

32.8%
 32.6%
Source: Tax Policy Center
  • Nor would these proposals oppress small businesses. To the contrary, most people with small business income would be net gainers. Tax Policy Center data indicate that only 2.2 percent of people with small business income would be in the two top tax brackets — and hence be affected by the proposal to allow the rate reductions in those brackets to expire for filers with incomes over $250,000 (over $200,000 for single filers). (A higher figure that has recently been cited has been misunderstood and misapplied, and is not the correct figure.) The number of small business owners who would benefit from the “middle class” tax cuts that would be extended or from new tax-cut measures that the Administration has proposed would dwarf the number who would face tax increases. Indeed, one little known fact is that ten times as many small business owners receive the Earned Income Tax Credit as are in the top two income tax brackets. 
  • Moreover, there is little evidence for the claim that a return to Clinton-era rates of taxation at the top of the income scale would seriously injure small businesses and damage U.S. job growth. If this were true, the experience of the last two decades would show that small-business job growth was considerably faster in the years when the Bush tax cuts were in effect than in the Clinton years when the top tax rates were higher.  Yet the opposite is true. The average rate of small business job growth was twice as high in the Clinton years as under President Bush before the current recession set in.
  • Policymakers also should consider the disturbingly large growth in recent years in inequality of after-tax income, especially between those with very high incomes and other Americans. CBO data show that between 1979 and 2005 (the years for which CBO has compiled these data), the after-tax income of the 20 percent of Americans in the middle of the income spectrum grew an average of $8,700 — or 21 percent — after adjusting for inflation, while the average income of the poorest 20 percent of Americans grew by $900, or 6 percent. In contrast, the average income of the top 1 percent of households increased by $745,000, or 228 percent. And other data show that in 2006, the top 1 percent of Americans secured a larger share of all pre-tax income than in any year since 1928.

    The 2001 and 2003 tax cuts exacerbated this trend.  CBO data show that these tax cuts further widened inequality. And the Tax Policy Center has estimated that in 2010, households with incomes of over $1 million will receive an average tax cut from the 2001 and 2003 tax changes of $158,000 each — as compared to $810 for households in the middle of the income scale. It is difficult to see how the nation can continue to afford providing such massive tax cuts to those at the pinnacle of the income scale. 

Finally, this testimony covers two related issues:

  • It finds strong merit in the Administration’s proposals to extend the expansions in the child tax credit, the EITC, and the American Opportunity Tax Credit that were enacted on a temporary basis in the recent economic recovery legislation, and to pay for those extensions. If paid for, these extensions should better reward work among low-income parents, increase educational attainment and productivity, and reduce child poverty, without enlarging the deficit.
  • The nation also needs to address climate change and can do so without imposing a large middle-class tax increase. This can be accomplished if emissions permits under a cap-and-trade system are auctioned and the principal (though not the only) use of the auction proceeds is to offset the increased energy costs that low- and middle-income families will incur, primarily through a refundable climate tax credit created for this purpose.

Click here to read the full-text PDF of this testimony (10pp.)

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