Why a tax-rates extension is a no-brainer (Updated)
President Obama is drawing fire from his left for seemingly agreeing, if a Huffington Post interview with White House adviser David Axelrod is any indication, to a two-year extension of the current federal tax rates. (UPDATE: Axelrod is now walking back that notion. Big surprise.)
I’m not sure what else Obama’s critics expected him to do.
In the first place, most economists agree that, if there’s ever a good time to raise taxes, this isn’t it. The economy is still too weak. Even speaking from a purely political standpoint, if Obama were to refuse to extend all tax rates for high earners and the economy were to remain stagnant, he’d be very vulnerable to further attacks that he was to blame.
Second, it’s undeniable that one loud and clear message from last week’s elections was that a majority of the electorate believes Washington’s fiscal problem is spending, not revenue. That said, it is hard for Republicans to argue at this point that they won enough of a mandate to make the rates permanent. We are in the middle, not the end, of a debate over federal taxing and spending. It will last through the 2012 elections.
Which brings me to the third point: Keeping the status quo on tax rates seems to be the only option compatible with taking seriously yesterday’s initial draft proposal from the president’s debt and deficit commission. The commission’s co-chairmen proposed a tax-code overhaul that moves in the direction of lower marginal rates and fewer deductions. Their specific ideas will continue to be debated, but I think enough people agree that this is the correct general direction. So, it would be very counterproductive to move in the direction of higher marginal tax rates in the meantime.
I’m still going over the commission co-chairs’ proposal and will have more to say on it soon. But I can already say that it is a serious enough set of ideas that it should be considered very carefully. There will be changes, I’m sure. However, I think that’s all the more reason not to add political noise to the discussion by changing tax rates now.
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108 comments Add your comment
CJ
November 12th, 2010
3:28 pm
Since Kyle’s away, I thought I’d respond to “No More Progressives” curiosity about the so-called FairTax (always a popular topic of conversation).
Of course when debating this proposal, rhetoric is just as important as facts. Call it a consumption tax, and you’re a great American. Call it a sales tax, and you’re trying to destroy America. Say the rate is 23 percent (inclusive), and you’re honest. Say that the rate is 30 percent (exclusive), and you’re a liar.
In fact, the proposed FairTax would replace all federal income taxes (including estate, capital gains, Social Security, Medicare,…) with a single federal 30 percent sales tax applied to both goods and services (including mortgage interest and health care expenses). That means that once the FairTax takes effect, an item with a pre-tax price of $1.00, will have a post-tax price of $1.30 (plus state and local sales taxes).
Supporters argue that if the price tag says $1.00, then that’s what you’ll pay at the register because the FairTax will be included in the advertised price. But since marking goods and services this way isn’t required by the legislation, they’re wrong. If the price tag says, $1.00, then 30 cents will be added at the cash register.
Supporters also argue that we should refer to it an inclusive tax because income tax rates are inclusive. Therefore we should be able to compare the FairTax proposed rates with income tax rates. But that’s not an apples-to-apples comparison. In any given year, people can spend significantly more than they receive—such as when they buy a house, a car, or have major medical bills. If people are under the impression that they’re paying a tax that’s roughly equivalent to 23 percent of their income (or less due to the prebate proposal), when in fact, they’re paying a significantly higher (or lower) rate due to annual income/spending disparities, then supporters are doing themselves a disservice by referencing the tax as inclusive. They’re also performing a disservice to those who haven’t familiarized themselves with the proposal, since most would assume who that the advertised 23 percent is an exclusive rate just like the state and local sales tax rates that they’re used to.
I could go on forever about this tax and it’s prebate, but the main thing to remember about the proposed “23 percent inclusive consumption/30 percent sales tax” is that these advertised rates are established in the proposed legislation for one year only (proponents don’t want their supporters to remember this). The FairTax rate would be automatically adjusted every year using a formula included in the legislation. If the advertised rate doesn’t generate projected revenues (we all know what happens during an economic slowdown), then the FairTax rate goes up up up. No votes needed. Nice.
No More Progressives!
November 12th, 2010
3:49 pm
In fact, the proposed FairTax would replace all federal income taxes (including estate, capital gains, Social Security, Medicare,…) with a single federal 30 percent sales tax applied to both goods and services (including mortgage interest and health care expenses). That means that once the FairTax takes effect, an item with a pre-tax price of $1.00, will have a post-tax price of $1.30 (plus state and local sales taxes).
I knew you didn’t read the book.
Anything you buy has 23% of it’s value as imbedded taxes. Therefore, an item selling for $1.00 is actually worth $.77. You then add the Fair tax onto that figure, and your back at a sales price of $1.00. State taxes are not figured in here.
There is no additional 30% added onto the item, as CJ erroneously suggests. This is the elementary form of the concept; someone wh read the book surely would know this.
Also, CJ forgets that select items (like food) are exempt.
Read the book my butt.
CJ
November 12th, 2010
3:55 pm
“Anything you buy has 23% of it’s value as imbedded taxes. Therefore, an item selling for $1.00 is actually worth $.77. You then add the Fair tax onto that figure, and your back at a sales price of $1.00.”
I’m pretty sure that I wrote, “Supporters argue that if the price tag says $1.00, then that’s what you’ll pay at the register because the FairTax will be included in the advertised price.” Yup. I see that that statement is still up there.
NMP is going by what’s in the book. He should, as they say, “read the bill.” There’s nothing in the legislation that would require the tax to be imbedded in the actual price (not exactly transparent).
CJ
November 12th, 2010
4:11 pm
correction”…embedded in the
actualadvertised price…”CJ
November 12th, 2010
4:19 pm
By the way, it’s been a few years, but I could have sworn that Boortz and company made a big deal out of the fact that the FairTax proposal had no exemptions whatsoever, including food (they were arguing on behalf of the tax’s simplicity). They proposed the prebate in lieu of exemptions for necessities.
ojp4president
November 12th, 2010
11:11 pm
“One day he says no to Bush tax cut extensions, then the next day he says they’ll expire. But the real question is if these liberal socialists are going to remove the child tax credit and mortgage interest deduction. I’d like one libDemwit to ’splain how those two are for the “rich” only.”
Don’t let the facts slow you down. The first day he said that he might be willing to compromise and the media took that as extending all the cuts–it was never said.
Furthermore, it’s clear you don’t understand any of the suggestions made by the BIPARTISAN deficit reduction committee nor did you read it. The suggestion is to cut all tax rates and eliminate a number of deductions, thereby reducing the actual tax rate for some people and increasing it for others. Going from 30% taxes and numerous deductions to a flat rate of 18% without deductions would probably save most middle class tax payers while also simplifying the process of filing for taxes.
I would suggest educating yourself before trying to criticize others for their beliefs.
buzz
November 13th, 2010
1:37 pm
The Bush tax cuts for the rich have been in place for several years already. And have produced zero jobs. Now Repubs. Argue it will kill jobs to take them away? BS. The only thing those taX cuts are doing is EXPLODING our deficit. If Obama extends them. He will be a one term Prez.
No More Progressives!
November 15th, 2010
12:40 pm
That means that once the FairTax takes effect, an item with a pre-tax price of $1.00, will have a post-tax price of $1.30 (plus state and local sales taxes).
No. A $1.00 item with the embedded taxes removed is $.77. With the Fair tax added back at 23%, it would be $1.00. You added 30% back to your example, arbitrarily and deceptively.
Smoke & mirrors. You lefties are just going to have to understand that you do not have first dibbs on my earnings, no matter who or what you are. Disolve the IRS. Tomorrow.