Fact-Checking the Tax Provisions in the 'Pledge to America'

FactCheck.org has published a report on the Republican Party’s Pledge to America and has criticized a number of "dubious factual claims." Check out their commentary on a number of tax provisions below, courtesy of the Tax Prof.

Pledge, page 14: Unless action is taken, a $3.8 trillion tax hike will go into effect on January 1, 2011 that will unravel these policies. A family of four with a household income of $50,000 a year will have to pay $2,900 more in taxes in 2011.

Fact: True, but misleading. What the Pledge fails to note is that Obama and Democratic leaders in Congress have consistently promised to extend the Bush tax cuts for all families making less than $250,000 a year, and singles making less than $200,000. It’s true that hasn’t happened yet, but the reason is that several House and Senate Democrats are agitating to extend the cuts for everybody, even those with the highest incomes.

Congress might yet fail to extend most or all the cuts before they are scheduled to expire next year. As we reported in a Sept. 3 Ask FactCheck itemon this issue, there’s always a possibility that Congress will grind to a halt in a stalemate. And sure enough, on Sept. 23 Senate Democrats announced they would put off any vote on extending the cuts until after the election. A spokesman for Democratic leader Harry Reid of Nevada said, "Democrats believe we must permanently extend tax cuts for the middle-class before they expire at the end of the year, and we will."

Pledge, page 14: [Obama] also wants to raise taxes on roughly half of small business income in America.

Fact: This is an exaggeration. Republicans are equating "net positive business income" reported on individual returns with "small business income," which isn’t correct. They rely on a report from the nonpartisan staff of the Joint Committee on Taxation (p. 12), which estimated that about 3% of taxpayers who have any business income on their personal returns would see a tax increase under Obama’s proposal, and that those 750,000 taxpayers account for about half of all the business income reported.

But some of that income is from big businesses raking in tens of millions of dollars a year. The JCT stated quite clearly that "These figures for net positive business income do not imply that all of the income is from entities that might be considered ’small.’" Some in fact are quite large, and those big businesses account for a good chunk of that income.

The JCT said: "For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million."

Republicans do have a point here. Many small businesses and some large fraction of small-business income will be adversely impacted by raising the top rate on individual taxpayers.

The fact is, though, that the JCT couldn’t estimate how much of the total business income was accounted for by "small" businesses, or how many of the 750,000 individuals affected own "small" busineses. What we do know is that a good deal less than half the small business income, and something less than three percent of small business owners, would be subject to higher taxes.

Pledge, page 28: Roughly 16,500 IRS auditors, agents, and other employees may be needed to collect the hundreds of billions of dollars in new taxes levied on the American people by the new health care law.

Fact: This is simply not true. As we reported last March, this figure "stems from a partisan analysis based on guesswork and false assumptions, and compounded by outright misrepresentation." For an eye-opening account of how Republican staff members of the House Ways and Means committee came up with this inflated figure, see our Ask FactCheck item posted March 30. Most of what the IRS will do under the law is hand out tax credits, not collect penalties.

National Debt to be Higher than White House Forecast

According to the Congressional Budget Office, Obama’s proposed budget would add over $9.7 trillion to the national debt over the next ten yeas. They made the announcement on Friday, and claim that the President’s tax cuts for the middle class are the main reason for the shortfall.

The 10-year outlook released by the nonpartisan Congressional Budget Office is somewhat gloomier than White House projections, which found that Obama's budget request would produce deficits that would add about $8.5 trillion to the national debt by 2020.

The CBO and the White House are in relative agreement about the short-term budget picture, with both predicting a deficit of about $1.5 trillion this year -- a post-World War II record at 10.3 percent of the overall economy -- and $1.3 trillion in 2011. But the CBO is considerably less optimistic about future years, predicting that deficits would never fall below 4 percent of the economy under Obama's policies and would begin to grow rapidly after 2015.

Deficits of that magnitude would force the Treasury to continue borrowing at prodigious rates, sending the national debt soaring to 90 percent of the economy by 2020, the CBO said. Interest payments on the debt would also skyrocket by $800 billion over the same period.

Continue Reading at WashingtonPost.com…

FACT CHECK: Obama 'Tax Hikes' a Matter of Words

From The Associated Press:

President Barack Obama says he would lower taxes on 95 percent of Americans now and raise them on the rich in 2011. Republicans say he will increase taxes for all and in the midst of a recession to boot.

So who's right?

Yes, all Americans would pay more under the president's policies. His own aides concede that.

But no, Obama would not raise taxes in the midst of a recession, as long as his economic assumptions bear out.

The president's budget lowers taxes immediately for middle- and low-income Americans — about 95 percent of working families. It also raises taxes starting in 2011 on households that earn more than $250,000 a year.

But Obama also would impose a tariff on industries that pollute. Obama's top budget and economic advisers say those costs will get passed along to consumers. A tax? Indirectly, yes. Felt by most Americans? Yes, again.

Republicans also have asserted that Obama's tax increases would occur in the midst of a recession, a bad idea when the economy needs consumers to spend more.

But the tax increases won't occur for two years. The tariff on greenhouse emissions won't generate revenue until 2012, according to the president's budget. Obama's economists are counting on being out of the recession by then, and the chairman of the Federal Reserve Bank has said "there is a reasonable prospect" that 2010 could be a year of economic recovery.

But Obama is ANNOUNCING tax hikes and fee increases in the midst of a recession. And that, Republicans say, is bad enough.

"People may read it as a tax increase, even if, effectively, it's not for 18 months, let's say," said Sen. Charles Grassley of Iowa, the top Republican on the Senate Finance Committee.

THE CLAIM: "The president's budget increases taxes on every American, and does so during a recession," said Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee.

Tax Related Misconceptions in the Final Debate

Wednesday night was the third and final debate between Sens. Barack Obama and John McCain, and as can be expect taxes and the economy were central issues of the debate. Unfortunately, both candidates used confusing figures and lies about their opponent to make their points. Fortunately, the tax experts of the Tax Foundation have reviewed the CNN transcript of the debate and have reviewed the misleading statements made by both candidates.

Fact Checking Sen. McCain

Early in the debate, John McCain once again voiced his concern over the rising national debt and claimed that he could balance the budget in his first four years in office. But given that his tax policies contain major tax cuts that will not pay for themselves (especially in 2011 and 2012 after Bush tax cuts expire), it is a pretty safe bet that Sen. McCain is not going to be balancing the budget in 2012. We definitely know that neither Obama nor McCain is going to balance the budget in the first year or two of his administration.

Next in the debate, for about the millionth time in the past six months, McCain said this about Sen. Obama's voting record:

Sen. Obama talks about voting for budgets. He voted twice for a budget resolution that increases the taxes on individuals making $42,000 a year.

Once again, that was a non-binding party-line vote taken earlier this year in the Senate. And if voting records on tax issues are relevant despite what the senator is proposing as a candidate, then shouldn't Sen. McCain's position on the Bush tax cuts in 2001 and 2003 (which he opposed) be fair game?

On the issue of energy, Sen. McCain said this about trade with Canada:

By the way, when Sen. Obama said he would unilaterally renegotiate the North American Free Trade Agreement, the Canadians said, "Yes, and we'll sell our oil to China."

What he doesn't understand is that even if Canada shipped the oil to China, the effect on the U.S. would be relatively small given that other oil that is currently going to China would flow to the United States. The difference would be transportation costs and any impact of a tariff. Basically, this statement ignores the fact that there is a world market for oil.

Moving to the issue of healthcare, Sen. McCain said this in support of his $5,000 per family health care tax credit:

The average cost of a health care insurance plan in America today is $5,800. I'm going to give them $5,000 to take with them wherever they want to go, and this will give them affordability.

The reason I bring this up is because later, Sen. Obama quoted the figure as being $12,000. It appears that Sen. McCain got his figure from this report, which says this: "Nationwide, annual premiums averaged $2,613 for single coverage and $5,799 for family plans in the 2006-2007 period. For single policies, annual premiums ranged from $1,163 for persons under age 18 to $5,090 for persons aged 60-64. For family policies, premiums ranged from $2,325 for policies covering children under age 18 to $9,201 for families headed by persons aged 60-64.

Obama's $12,000 figure appears to come from this Kaiser report.

Fact Checking Sen. Obama

Throughout the debate, Sen. Obama repeatedly showed an unfortunate ignorance of one of the fundamental principles of taxation: all taxes are paid by people. On multiple occasions, Obama claimed that businesses or corporations "can afford" to pay higher taxes. But such a statement is just ridiculous. Companies have no "ability to pay" taxes. Does the corporation's building pay the tax? How about its fax machine or water cooler? No. People pay the taxes. Here is one such example of why Sen. Obama would get an F in public finance:

Then Exxon Mobil, which made $12 billion, record profits, over the last several quarters, they can afford to pay a little more so that ordinary families who are hurting out there -- they're trying to figure out how they're going to afford food, how they're going to save for their kids' college education, they need a break.

What Sen. Obama doesn't understand or doesn't want to tell the American public is that when Exxon Mobil writes that check to Uncle Sam, some PERSON is paying the price for that. In the short-run, that person could be a shareholder, a worker, or a consumer. But the fact that Exxon Mobil has a lower after-tax profit means that some PERSON is worse off. For example, Exxon Mobil would likely reduce its dividend payment, or its share price could fall, and that hurts every PERSON who was invested in Exxon Mobil at the time the tax was enacted.

And this isn't controversial. If you called up Obama's top economic advisers Jason Furman or Austan Goolsbee on November 5 (after the election) and asked them who pays taxes, both of them would tell you that people pay all taxes, and that a company merely acts as a means of collecting for the government the taxes imposed on owners of capital and in some cases, the company's workers. In fact, if we truly taxed Haig-Simons income as a pure income tax would call for, it could be possible for no tax to be levied on a corporation assuming retained earnings were taxed.

Sen. Obama made a similar gaffe here:

Because after eight years of failed policies, he and I both agree that what we're going to have to do is to re-prioritize, make sure that we're investing in the American people, give tax cuts not to the wealthiest corporations, but give them to small businesses and give them to individuals who are struggling right now, make sure that we finally get serious about energy independence, something that has been languishing in Washington for 30 years, and make sure that our kids get a great education and can afford to go to college.

The fact of the matter is that there is no wealthy corporation. The stockholders of a corporation that holds in its business operation a lot of money (retained earnings) and assets may be wealthy, but the corporation itself is not wealthy. It just makes no sense. It's just populist rhetoric that sounds good.

On the issue of whose tax plan would provide more relief to middle-income taxpayers, Barack Obama once again brought out this line:

And 95 percent of working families, 95 percent of you out there, will get a tax cut. In fact, independent studies have looked at our respective plans and have concluded that I provide three times the amount of tax relief to middle-class families than Sen. McCain does.

The 95 percent figure is correct. Even though many conservatives have argued that you can't cut taxes for people who pay no income taxes, most of those who are receiving refundable tax credits on the income tax side are still net taxpayers given that they do pay payroll taxes, corporate income tax, excise taxes, etc. (And even that assumes the fact a person is a net taxpayer even matters versus the net fiscal incidence of the person, and once we go down that road, at least we are actually getting somewhere on the core questions of public finance and the role of government in distributional outcomes.)

The independent study that Sen. Obama is referring to comes from Tax Policy Center, which does indeed verify this fact for middle-income tax units when you exclude the effects of the two candidates' health care plans. What Sen. Obama doesn't tell you is that Sen. McCain's health care tax plan (which he criticizes on many occasions and runs about a billion television ads a day on) would actually provide more savings to middle-income tax units (as a group) than Sen. Obama's health care plan. And when you include the effects of these health care plans, the three-times as much tax relief claim no longer holds. When TPC ran the tax plans, they analyzed the health care plans separately from the other parts of the candidates' tax plans.

Speaking of Sen. McCain's health care plan, Sen. Obama once again made this invalid comparison about it:

By the way, the average policy costs about $12,000. So if you've got $5,000 and it's going to cost you $12,000, that's a loss for you.

Sen. Obama's saying outright that Sen. McCain's plan is a loss for you is nonsense.

The $12,000 cost and $5,000 credit are not comparable unless one assumes two facts for McCain's health care tax plan: (1) the worker will be dropped by his employer, and (2) the worker's wages will not increase to offset the lost health care. For most workers, this isn't going to happen. If somebody is receiving $12,000 in health insurance that is now taxed as ordinary income (and there is no dropping of coverage), a $5,000 credit is going to more than offset the additional tax a person must pay on his/her employer-provided health insurance. Eventually, since the credit is indexed for inflation and not health-care costs, the credit's value would diminish. But over the next ten years, Tax Policy Center has estimated that McCain's health care tax plan is a $1.3 trillion tax cut for American taxpayers, and they have shown that the average middle-income tax unit would be better off under McCain's health care tax plan than Obama's in that time period. Now it is true that the average doesn't hold for everyone in the middle and some will gain a lot in the middle and some could lose a lot in the middle (such as those whose coverage is dropped), but the reality is that the health care tax plan is the most progressive part of Sen. McCain's plan. It would make the federal income tax more progressive.