Q&A on Taxes and the Economy
Statement
Q: How is the threat of higher taxes impacting the economy?
A: I hear regularly from Iowa employers about how uncertain tax policy, along with the threat of costly new regulations from Washington, prohibits them from being able to make pro-growth decisions including hiring new workers. As it stands, if Congress and the President do not act by the end of this year, taxpayers will face $310 billion in tax increases in January. The failure to extend tax relief would hit all taxpayers, undermine small businesses and be a drag on the economy. Some experts, including those at the nonpartisan Congressional Budget Office, find that such a large tax increase could put the still struggling economy back into a recession.
Q: What tax relief is set to expire?
A: A number of tax provisions are scheduled to expire at the end of 2012, including the 2001 tax relief package that includes across-the-board income tax relief, a reduced tax rate on the lowest levels of income to 10 percent from 15 percent, and the removal of millions of low-income individuals from federal income tax rolls entirely. The 2001 relief package increased the child tax credit from $500 to $1,000 and expanded it to provide a partial credit to certain low-income individuals with no net tax liability. It also includes marriage penalty relief, a rate reduction for dividends and capital gains, education tax incentives, and reduced estate tax liabilities that help family farms and other small businesses in Iowa and nationwide. Due to Congressional budget rules, this package of relief was set to expire in 2010. However, it was extended at the end of 2010 for another two years through a bipartisan agreement reached between members of Congress and the President. If it's not extended again this year, a family of four earning $50,000 will be hit with a $2,183 tax hike. A small business owner will face a top marginal tax rate hike of 17 percent.
A separate tax provision that's expiring at the end of 2012 is a patch for the alternative minimum tax -- known as the AMT. This patch increases the amount of income exempt from the AMT and allows certain personal credits against the AMT. It prevents an estimated 27 million additional taxpayers, or roughly one-fifth of all taxpayers including 193,293 Iowans, from owing the AMT. The predecessor to the AMT was enacted in 1969 in reaction to concerns that 155 high income taxpayers paid no tax. Without a yearly patch, the AMT, which was originally only intended to impact those 155 taxpayers, would impact 34 million taxpayers every year . The majority of these taxpayers are middle-class families who find themselves subject to this onerous tax because, under the AMT, their deductions for children or high state income taxes are significantly reduced or even eliminated.
In addition, there are over 60 temporary provisions that expired in 2011 and another 40 that are expiring this year. These include tax credits for the production of wind energy, biodiesel and cellulosic ethanol. These industries support good paying jobs here in America, jobs that are slowly disappearing as Congress and the President continue to fail to act.
Q: Why isn't Congress taking action?
A: Inaction is irresponsible, yet that's just what's happening. Despite bipartisan interest, including some support from the President, there is no consensus in Washington about how and when to deal with these expiring tax provisions. We need presidential leadership and, so far, the President has refused to lead. In May, with 41 other senators, I sent a letter to the Senate Majority Leader, Senator Harry Reid, urging him to take immediate action to stop the largest tax increase in history. As Majority Leader, he controls the agenda in the Senate. The conventional wisdom is that Congress will address these tax issues after the election during a lame-duck session of Congress. That sort of uncertainty hurts the economy. In 2009, Congress let a similar tax credit for biodiesel lapse at great cost. Twenty-thousand jobs were lost nationwide and the industry was left operating at 15 percent of its size the year before. Renewable energy and other job creators need and deserve tax certainty. In fact, extension of tax relief may be the best jobs program Congress and the President could propose thanks to the confidence it would give to employers and individuals. In June, former President Clinton said that extending "all the tax cuts due to expire at the end of the year" is "probably the best thing we can do right now." The former director of President Obama's National Economic Council, Larry Summers, in June said of tax rates that the "real risk to this economy is on the side of slow down" and that means "we've got to make sure we don't take gasoline out of the tank at the end of this year." With the unemployment rate having gone back up to 8.2 percent this summer, it's time for action for tax relief.
Q: What about the deficit and the need for more revenue?
A: Some try to argue that if you raise the marginal tax rates, you will bring in more revenue. The facts don't bear that out, probably because the taxpayers, workers, and investors of this country are smarter than that. We've had a 93-percent marginal tax rate -- then 70 percent, 50 percent, 28 percent, and now a 35-percent marginal tax rate. Regardless of the rate, you get the same amount of revenue, because as tax rates go up, taxpayers hire more accountants and lawyers to find ways to keep their taxes low. So regardless of how high the tax rate is, the government gets about the same amount of revenue and it works out to be about 18 percent of gross domestic product. Furthermore, Professor Richard Vedder of Ohio University has studied tax increases and spending. According to his analysis, over the entire post World War II era through 2009, each dollar of new tax revenue was associated with $1.17 in new spending. Another study, this one by the National Bureau of Economic Research, finds, "As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over Gross Domestic Product (GDP) ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions." Rather than reducing overall spending, the budget proposed in February by President Obama proposed $2 trillion in tax increases to increase government spending above current levels.
As far as the 2001 tax cuts, I was chairman of the tax-writing Senate Finance Committee and shepherded the legislation through Congress. By easing the tax burden on both workers and investors, these bills helped spur economic growth and generate revenue to the federal treasury. In response, the U.S. economy experienced a record 52 months of uninterrupted job gains, adding more than 8 million new jobs. In addition, the GDP, which is the total value of final goods and services produced in the U.S., grew for 24 consecutive quarters at an average rate of 2.78. At the same time, the expanding economy resulted in an influx of revenue to the federal treasury, which reduced the annual budget deficit from about $415 billion in fiscal year 2004 to $167 billion in fiscal year 2007. Unfortunately, due to Wall Street shenanigans and the mortgage meltdown causing the financial crisis, as well as record spending, we're now experiencing record budget deficits. High taxes and deficit spending crowd out private investment that could grow the economy and create jobs.
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