Thursday, November 15, 2012

The President's Tax Math

At the Wall Street Journal:

'You know, the math tends not to work," declared President Obama at his Wednesday press conference, as part of his explanation for why closing tax loopholes for the wealthy wouldn't provide enough revenue for a budget deal. Ergo, he says, tax rates must go up immediately for those making more than $250,000 a year, even if this means sending the economy over the January 2013 tax cliff.

The President must be getting bad advice because his math is mistaken in two ways. He's wrong on the revenue arithmetic of limiting deductions, and he's also wrong in claiming that raising tax rates as he proposes would do much better.

Regarding deductions, we refer readers to an October 17 study, in which even the liberal economists at the Tax Policy Center report that capping all itemized deductions at $50,000 a year for each tax filer under current policy would yield $749 billion in extra revenue from 2013-2022.

Reducing the annual deduction cap to $25,000 would raise an additional $1.286 trillion over 10 years. Lower the cap still further to $17,000, as Mitt Romney once suggested during the campaign, and the revenue increase soars to $1.747 trillion by 2022. Our preference is that Republicans hold out to use this revenue to finance a reduction in tax rates as part of a larger tax reform, but similar math applies in any case.

It's important to note that these revenue estimates are based on static analysis, a Tax Policy Center specialty that doesn't consider changes in behavior. But then that's the same kind of static analysis that Mr. Obama is insisting on. It's important to note as well that these estimates apply to capping the itemized deductions of all taxpayers, not merely those who make more than $250,000.

But the liberal class warriors at the Tax Policy Center also did the math for the distribution tables for this deduction cap when they were trying to defeat Mr. Romney. And, lo, they found that the top quintile of income earners would pay 96.2% of the higher taxes if deductions were capped at $50,000. The top 1% of earners would pay 79.9% of the higher tax revenue from capping deductions, and the top 0.1% would pay no less than 48.4%.

In other words, the rich would still be soaked and the middle class would largely be spared. Is that enough tax fairness for you, Mr. President?

As for Mr. Obama's implication that higher tax rates will bring a revenue windfall, he is simply being disingenuous. The Joint Tax Committee's budget score of Mr. Obama's proposal to raise taxes on capital gains, dividends, and income above $200,000 while reinstating the PEP and Pease deduction phase-outs yields merely $823 billion over 10 years.

That's barely more than the $749 billion from capping deductions at $50,000 a year. And at an annual average of $82 billion a year in revenue, it's merely 7.5% of last year's $1.1 trillion federal budget deficit. And that's assuming no negative impact on revenues from slower economic growth due to higher tax rates on savings and investment. To borrow a phrase, "the math tends not to work."

All of which makes us wonder why Mr. Obama is so insistent on raising tax rates now, even if he can get nearly the same amount of revenue from reducing deductions. Here's one guess: He really doesn't care if there's a budget deal this year that avoids the tax cliff.
Well, it's revenge, of course.