The President’s Tax Plan

The first thing to note about Obama’s plan is that it will not let all the Bush tax cuts expire. Instead, it would preserve a substantial portion of the tax cuts for the bottom 75% of taxpayers, but allow taxes to increase for the top 6% of income earners. A summary of Obama’s tax plan is shown in the table below from the Tax Policy Center:

Some of the notable tax cuts in Obama’s plan include: 1) extending the American Opportunity tax credit. This is a refundable tax credit for undergraduate college education expenses, including tuition, fees, and course materials. An individual can claim a maximum of $2500 on the first $4000 on educational expenses per year for either themselves or for their dependents; 2) extending the Earned Income Tax Credit (EITC) for large families. EITC is a tax credit for working individuals who earn low to moderate wages; 3) Expanding tax credits for child and dependent care; 4) Extending the Research and Experimentation (R&E) tax credit for businesses as a means to promote innovation and remain competitive. This tax credit was first issued in 1981 and has been extended by congress ever since; 5) Expand health insurance tax credits for small employers; 6) Provide a temporary 10% tax credit for companies that either hire new workers or increase wages; and 7) Provide tax credits for companies making investments in selective energy sources.

Obama’s plan also details his proposed tax increases. Some major highlights: 1) he would allow the Bush tax cuts to expire on individuals earning more than $250000; 2) he  would restore and modify the estate tax as described in my previous post; 3) Increase taxes on foreign income; 4) Raise taxes on financial and insurance industries and products; 5) Increase unemployment insurance taxes; and 6) Eliminate tax cuts for fossil fuel companies.

What would these measures do? Obama’s tax cuts would cost about $400 billion over 10 years and his tax increases would yield about $ 2.1 trillion over the same time. Thus, for the period between 2013-2022, Obama’s tax policies would increase government revenue by $1.6 trillion. In contrast, if all the tax cuts expire as scheduled, government revenue over the same period would increase by about $ 4.9 trillion.

If allowing all of the Bush tax cuts to expire would raise a lot more revenue and significantly reduce the deficit, why propose a plan with smaller deficit reduction? As I mentioned in my previous post, analysis from the congressional budgeting office (CBO) predicts that allowing all the Bush tax cuts to expire would almost certainly lead to another recession and raise unemployment to about 9%. In contrast, although Obama’s plan would run a higher deficit, it is expected to boost economic growth in the short-term (2013-2017). So Obama seems to be trading lower unemployment for a higher deficit for now. In the long run (beyond 2018) however, higher deficits will drag down economic growth and Obama has not yet put forward a concrete plan to address this issue. The recommendations offered by his Simpson-Bowles deficit reduction commission would be a good place to start. Overall, the theme in Obama’s tax plan seems to be to run budget deficits and stabilize the economy and kick in some revenue increases in a way that does not derail the economic recovery. What is missing is a long-term proposal for deficit reduction.

Next up: Romney’s tax plan

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