Monday, August 8, 2011

S&P Does Not Believe The Bush Tax Cuts Will Expire In 2012

Rep. Allen West (R-FL), a favorite among tea party Republicans, insisted Monday during an appearance on the conservative Fox News Channel that a refusal to increase government revenues through taxes had "nothing" to do with Standard & Poor's dropping America's credit rating last week. Many other conservatives are making the same claim running from responsibility to for S&P's downgrade and the world wide market turmoil it wrought on Monday.

Those claims are patently false, according to S&P's own press release announcing the ratings drop. A line in S&P's full report, wherein it downgraded the sovereign debt of the US from AAA to AA+, states:

"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."

First, it's correct that that the GOP is rigidly anti-revenue, and would resist any measure that would raise revenue. Second, S&P notes, the 2001 and 2003 Bush tax cuts cuts are due to expire, meaning no measure is needed to get rid of them. They'll just go away unless congress votes to renew the cuts. They clearly conclude that Republicans will once again roll Democrats into accepting a continuation of the Bush tax cuts - like the did last December.

This chart comes from Barrie McKenna’s great article on US tax rates, and pretty much speaks for itself. While the rest of the developed world has seen its tax rate rise as it got richer, the US stands out as the one country where tax rates have been going down. In the OECD, only Chile and Mexico have lower tax burdens, and neither of them have been decreasing: both have relied very much on state-owned commodity wealth to stand in for tax revenue.

As McKenna reports,

The total tax burden on Americans, as a percentage of gross domestic product, stood at 24 per cent in 2009 – lower than it was in 1965 and still falling. That compares to 31.1 per cent in Canada, 34.3 per cent in Britain, 42 per cent in France, 37 per cent in Germany and 43.5 per cent in Italy. The Japanese, Australians and South Koreans all pay significantly more.

The United States is the only major country without a national value-added tax and its sales taxes are lowest in the OECD. Likewise, U.S. fuel and sin taxes are at the bottom among rich countries. And generous tax breaks mean many businesses and individuals pay few taxes, placing a heavy burden on a relatively narrow tax base…

Bill Frenzel, a former Republican congressman and now a scholar at the Brookings Institution in Washington, agrees no budget fix is possible without tax hikes…

Americans, he said, will never accept the kind of tax levels that exist in most other countries.

“The U.S. has always been a low-tax country,” he explained. “And we like it that way.”

This raises two questions. The first is why America’s taxes are so much lower than anybody else’s. Its system of government, after all, is a pretty standard democracy, so it’s not exactly baked in to the Constitution. The second question is why Americans don’t actually appreciate how low taxes are here. It’s a standard talking point in US politics that taxes are too high, and must be lowered; Republicans are adamant that even modest tax hikes, to levels still well below the rest of the developed world, would be economically devastating.

Right now a deal seems to be getting done in Washington which reduces the deficit by means solely of spending cuts, with no tax hikes at all. That makes no sense: just as it’s right that people should pay a higher tax rate as they get richer, the same is true of countries as well. Instead, the US seems to think that it can work as an advanced democracy while maintaining a tax rate more commonly associated with tinpot basketcases. Up until now, it’s managed to do that by borrowing the difference. But if it wants to try to cut spending to a level commensurate with its tiny tax base, it’ll soon learn how economically disastrous that can be.

(Click picture to enlarge)

Green line is the top marginal rate for married couples filing jointly (most years dividends were tax like ordinary income until 2003). Orange is the top rate for income from capital gains. The top corporate tax rate is included for comparison. Your marginal tax rate is the rate you pay on the "last dollar" you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax.

Over the years, changing the amount of taxes people pay was accomplished not just by changing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than 50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people "qualify" for the top marginal rate.

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