Sunday, November 20, 2011

The REAL stumbling block in deficit reduction

The REAL stumbling block that is preventing the Supercommittee from coming up with a plan for $1.2 trillion in deficit reduction is a debate over taxes and tax fairness.  The Republicans want to give significant additional tax breaks to the richest Americans.  The Democrats say that would mean substantial additional cuts in domestic spending and entitlement programs that would place an additional burden on the middle class and the poor that are already struggling financially.

The Republicans are proposing to cut the tax rates for all income brackets.  For example, the bottom rate would go from 10% to 8%, the middle rate would go from 28% to 23% and so on.  See the chart below.  It sounds great.  Who wouldn’t want to pay less taxes?  And, magically the Republicans argue that by eliminating some tax deductions that their plan would actually generate MORE revenue.  Tax cuts would lead to revenue increases.  But, is that REALLY what the plan would do?  Not exactly.

The Center on Budget and Policy Priorities has taken a look at the Republican proposal.  The CBPP found:

The fact that the plan would cut all rates by an equal percentage does not mean the cuts would affect all income groups equally.  In reality, the rate cuts would benefit high-income people much more than middle- or lower-income people, both in the dollar amount of their tax cuts and in the percentage increase in their after-tax incomes.  There are two reasons why. 
  • Because the current tax structure is progressive, an across-the-board cut in tax rates results in much larger percentage-point reductions in tax rates in the higher tax brackets than in the lower brackets.  For example, the top rate would fall by seven percentage points (from 35 to 28 percent), while the 15 percent rate would fall by only three percentage points (to 12 percent). 
  • High-income people would benefit from the reductions in all of the lower brackets as well, since part of their income falls into those lower brackets.

The real impact on the after-tax income is shown in the chart from the Tax Policy Center.  As you can see, most of the benefits from the Republican tax proposal go to the very rich with millionaires receiving more than double the benefit of middle-income Americans.

Income inequality in the United States is among the highest in the world and is at a level we have not seen since the 1920s prior to the Great Depression.  Click here to see the evidence:

Now, Republicans want to make it worse by substantially reducing the tax liability of the richest Americans.  It’s the wrong way to go. 

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