Wednesday, July 11, 2012

What's the Big Deal About $250,000?

On Monday, President Obama announced that he was asking congress to extend the Bush-era tax cuts for those making less than $250,000. I still want all of them to go away. It's not that I think people don't need the break. It's that I'm still unhappy with the way the cuts were passed in the first place.

To remind everyone, they were given a 10 year sunset aiming for 2010. That happened for two reasons: First, keeping it at 10 years kept the sticker price down to the level that would pass congress with enough Democratic votes. Second, reconciliation is only possible when the expenditure doesn't run past ten years. If they'd been permanent cuts, then the filibuster would have been in play and there wouldn't have been any cuts because they didn't have 60 votes in the Senate. So the law, known as "The Economic Growth and Tax Relief Reconciliation Act" was DESIGNED to expire after 10 years. That's not just a good idea, it's the law.

Of course, as soon as the law was in force Republicans started talking about how Democrats wanted to raise taxes because they wouldn't extend them. As I've written before, nobody has to do anything and these cuts expire. Nobody was trying to raise taxes. They were simply letting the cuts expire as they were intended to do in 2001.

So in December of 2010, President Obama reached a deal with the lame duck congress to extend them for two more years. Now he's proposing they be extended at least for the middle class.

My personal preference is to let them all go. Then Congress can debate new tax policy on an even playing field following the "pay-go" rules we've had on the books for some time.

You've probably read that those who oppose the president's proposal repeat claims about penalizing the job creators and small businesses. The best estimates show that somewhere around 3% of small businesses could be affected. Proponents of the cut observe that everyone gets the cut up to the first $250,000 and income above that would be taxed at 3% higher than it currently is.

Here's some additional interesting data, at least to me. Today in the Washington Post, Lori Montgomery did a story showing that effective tax rates paid in 2009 had been reduced compared to 2007 and that the rates hadn't been that low in 30 years.

In the story, this reaction was given by a Republican spokeperson: Michelle Dimarob, spokeswoman for Ways and Means Chairman Dave Camp (R-Mich.), countered: “Under President Obama and the Democrats who control Washington, Americans have lost their jobs, seen their wages decline and fallen into lower tax brackets. A weak economy and fewer jobs is nothing to cheer about.”

That sounded funny to me. First of all, we're talking about the 2009 tax year, so it's hard to put all that blame on President Obama and the Democrats. More importantly, I went to the CBO data linked in the report. That report gives this summary table.

This table breaks down the changes in income between 2007 and 2009 (in constant 2009 dollars). It explores the data by quintile and then breaks the top quintile into smaller units (the next 10, then 5, then 4, then 1). If you look at the "all quintiles" column, you see that the average tax rate fell from 19.9 to 17.4. The average after tax income dropped by $7,800. That seems to fit with Ms. Dimarob's claim that people had less money.

But averages can fool you because they're affected by extremes. Look what happens to actual income by quintile. The lowest quintile gains $600. The next quintile loses $300. The middle quintile loses $1,000. The fourth quintile loses $1,600. The top quintile loses $34,000. But when you look at the 81st to 90th percentiles, they only lost $2,600. The 91st to 95th only lost $6,400. The 96th to 99th lost $30,500 and the top 1% lost $506,000.

Look at the change in average federal tax rate. The bottom quintile dropped by 4.1%. The second quintile dropped by 3.5%. The middle quintile by 2.9%. The fourth quintile dropped by 2.4%. The top quintile dropped by 1.5%. The 81st to 90th dropped 1.8%. The 91st to 95th dropped 1.4%. The 96th to 99th percentile dropped by 1.3%. The top 1% saw their tax rate go up by .6%.

Now look at the average income levels across the chart. We hit the $250,000 level somewhere above the 95th percentile. It's true that they saw their income levels fall, but their magnitude of their holdings distorts the rest of the picture. In other words, from the bottom quintile through the 95th percentile, there are minor differences in tax rate and in change of income. But above the 95th, there's a significantly different picture.

I don't want to say that "the private sector is doing fine, but the income gap  at the top is humongous. Remember, these aren't middle class impacts. I still think middle class encompasses the 3rd and 4th quintiles.

There's no way the CBO data substantiates the claim that this happens because main street suffers. And it suggests that something significant is happening at about $250,000. I still think we should start over on the tax code, but I'm certainly more comfortable with the two-tiered conversation after seeing this data.

Ms. Dimarob and Rep. Boehner: You can toss your talking points where ever you'd like, but the actual facts don't back up your claims. Given no more trouble than it was for me to pull up the CBO chart and run the comparisons, I have to assume that the congressional staffs know that the data doesn't support their claims. It saddens me that they cynically make them anyway.

In the meantime, I'll keep crunching numbers. It's too easy to do and way too important not to do it.

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