More Tax Cuts for the Rich? No Way! -- 6 Key Points About the Tax Debate Raging in Washington

Washington is engaged in a noisy fight over extending George W. Bush’s “temporary” tax cuts, set to expire at the end of the year.

The battle lines are clearly defined: President Barack Obama and the Democratic leadership are pressing to extend the cuts that put some money into the pockets of the middle class and let those for the top of the heap expire on schedule. House Minority Leader John Boehner, R-Ohio, said this week he might go along with that plan, but Senate Minority Leader Mitch McConnell, R-Kentucky, joined the rest of the GOP caucus in insisting that the cuts giving huge breaks to the rich be continued indefinitely as well. Some Blue Dogs have said they’d prefer to keep the break for their wealthy patrons in place, and Ben Nelson, D-Nebraska, arguably corporate America’s most reliable mouthpiece in the Senate, has signaled that he may join a Republican filibuster to block passage of any bill that allows them to expire.

National polls -- six of them in recent weeks -- show that the American people are firmly on the side of the Democrats in this fight, but as Greg Sargent pointed out in the Washington Post, conservatives are betting that any discussion of taxes will feed into the wholly inaccurate narrative that "Democrats want to raise your taxes." “Republicans,” he wrote, “seem to be gambling that the nuance of the debate will get lost in all the noise, and people will see Dems as liberal tax-hikers even though they want to extend the tax cuts for the middle class.”

It may work. The corporate media is once again doing its typically horrendous job illuminating what’s at stake in the fight, and for whom. And Democrats are doing their typically pathetic job crafting a cohesive winning message. They’ve allowed the tax cuts, passed in 2001 and set to expire this year -- in order to get away with some parliamentary shenanigans in the Senate -- to be branded the “Bush tax cuts,” and the debate to center around whether to extend them or to “raise taxes.” The entire discussion would look very different if the administration had put together a package of cuts that target only the middle class, called them the “Obama tax cuts,” and then forced conservatives to oppose them.

But that didn’t happen, so we have another muddled debate over a significant matter of public policy. To sort out the fact from the fiction, here are some of the key issues underpinning this fall’s big tax fight.

1. The Rich Get Plenty of Relief from Those 'Middle-Class' Tax Cuts

The central point of debate on this issue -- tax cuts for the middle class versus those for the wealthy -- represents a false narrative. The “middle class” tax cuts give everyone a break, across the board, on their first $200,000 of income ($250K for married couples). What’s more, according to the Center for Budget and Policy Priorities (CPBB), “high-income people actually receive much larger benefits in dollar terms from the so-called ‘middle-class tax cuts’ than middle-class people do.”

Specifically, recent estimates from the Joint Committee on Taxation show that extending just the middle-class tax cuts would provide more than $6,300 in tax cuts to households with incomes above $200,000, on average, compared to $1,132 in tax cuts for households with incomes between $50,000 and $75,000.

People making between $500K and a cool million would get a cut of $6,701 if the “middle-class” cuts are extended; if the cuts for the “wealthy” continue, they’d pocket an extra 10 grand, on average -- a cut of $17,467.

What’s really at stake are the very large cuts for those at the very top. According to CPBB, households with incomes of over $1 million would receive an average tax break of nearly $104,000 if the high-income measures are extended, versus $6,349 if they’re not. So, the issue is pretty simple: do we want to take on $1 trillion more in national debt over the next decade, on which we’d have to pay interest, to lop $98,000 from American millionaires’ tax bills?

There’s no “class war” between the rich and the middle class; the battle is between those who are wealthy today and all American workers who will be saddled with a bunch of additional debt in the future.

2. Budget Busters

According to the Congressional Budget Office, the sum total of the Bush tax cuts, if extended, would represent the single largest contributor to the deficit over the next decade. Conservative deficit hawks -- or deficit chickenhawks as the case may be -- respond to that reality by whistling as they pass the graveyard. Senator David Vitter, R-Louisiana, recently opined, “I don’t think we have to quote unquote ‘pay’ for that because it’s about Americans keeping their own money and our simply keeping the present tax rates in place.” He didn’t offer any proposed spending cuts, and didn’t mention the $2.7 trillion that extending all of the cuts would add to federal deficits over the next 10 years (or the cool trillion it would cost to extend only those cuts targeted at the top 2 percent of U.S. earners).

3. The Wealthy Don’t Invest the Money They Save in 'Job Creation'

One thing almost every conservative believes to be true, and all respectable economists agree is nonsense, is the idea that the wealthy take those tax breaks and funnel them back into the economy, spending lavishly and stimulating businesses to invest and create tons of new, high-paying jobs.

The reason that narrative is false is simple: they spend the same amount of money on their lifestyles either way, and simply take those cuts and add their value to their already healthy estates.

According to a study of high earners’ spending and saving patterns conducted by Moody's, “Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich.”

The Moody’s research covering couples earning more than $210,000 found that spending by the wealthy is more likely to be influenced by the ups and downs of the stock market than changes in income-tax rates.

Stock-market performance is the “primary factor that is driving the savings of the top 5 percent of households,” said Mustafa Akcay, economist and co-researcher of the savings data.

Increasing Americans’ saving rate is a worthy goal; borrowing a trillion dollars to do so for the wealthiest would be nothing short of a brain-dead policy.

4. Actually, Extending the Millionaire Cuts Will Stymie Long-Term Growth

Adding significant amounts of national debt threatens to send interest rates upward, which constrains new business investment and job creation. According to an estimate of that relationship conducted by former Bush Council of Economic Advisers chair Glenn Hubbard, Federal Reserve economist Eric Engen, outgoing OMB director Peter Orszag and William Gale, “the overall effect of the Bush tax cuts on economic growth has therefore been negative -- and it will continue to be negative if the cuts are extended.”

And as the economy sputters back to life and the demand for new loans increases, the upward pressure on interest rates is likely to grow even more.

5. A Big Lie About Small Business

An illustration of the power of the right’s noise machine was on display on Fox News last week when Chris Wallace, considered the network’s most “serious” reporter, confronted Austen Goolsbee, a member of President Obama’s economic team, with the claim that allowing the cuts on high earners to expire as scheduled would raise taxes on “half of small business” income. It’s a claim that’s repeated by conservatives every single day and it is as inherently dishonest as it is technically accurate.

The claim comes from an intentional misreading of a Joint Committee on Taxation report which found that the 750,000 tax payers in the top two brackets earn half of the trillion dollars in business income that will be reported on individual returns to the IRS. But that figure includes many, many businesses nobody would consider “small” -- in 2005, it included 12,862 S-corporations and 6,658 partnerships that had receipts of more than $50 million per year, according to an analysis of the Joint Committee report by In other words, very, very rich people will have to pay a bit more in taxes if the cuts for very, very rich people are allowed to expire, but we already knew that.

According to the Joint Committee’s report, only 3 percent of small business owners actually fall into the top tax brackets, so only 3 percent of small business owners -- those who earn the most -- would be affected if the cuts for the top 2 percent were to expire on schedule.

But that’s not the whole story. Again, adding a trillion dollars to the national debt over the next decade threatens to push up interest rates and that would truly harm, rather than help, legitimate small businesses.

6. You Call This Stimulus?

The best and worst argument for keeping the cuts on the highest earners in place is that they’d stimulate the economy.

It’s the best argument because it at least acknowledges that we have a real problem in our labor market, and that reduced consumption is central to that problem. That’s a refreshing break from the conservative blather about businesses not investing because they’re “uncertain” about government regulations to come.

It’s the worst argument because the cuts -- skewed toward the wealthy (whom we know will simply bank the cash) -- represent the worst bang-for-the-buck of any possible measure to stimulate the economy. According to the Congressional Budget Office, extending all of the cuts (they didn’t analyze the impact of extending only the “middle class” relief) would result in just 10-40 cents of stimulus effect for every dollar in lost revenue.

As William Gale wrote in the Washington Post, “of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck." He continued:

The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.

Spending money to kick-start the economy now and worrying about the deficit later is sound thinking. Taking on a trillion dollars in debt to get a fraction of that amount of stimulus is not.

The Bigger Picture

Those are just the specifics of what’s being lost in the hubbub. Context matters, and to give you a sense of how depraved our economic discourse is, one need only contrast how our budget deficits are being spun as an imminent economic disaster. Washington is telling us that we have to suffer some painful “entitlement reform” to right the ship -- yet according to the CPBB, extending Bush’s tax cuts over the next 75 years would cost the same amount of revenue as the entirety of Social Security’s long-term “budget gap.”

To read more about taxes and spending, budgets and deficits, check out Joshua Holland's new book, The Fifteen Biggest Lies About the Economy (And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America) (Wiley, 2010).

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