The Joint Committee on Taxation (JCT) is a committee established by Congress with several duties. Among them are to make reports, studies and recommendations concerning taxes. They’ve recently run some numbers as part of an “experiment” to see how much the income tax rates could be reduced if they “broadened” the tax base. I thought I would pass the results along so you can be armed with some knowledge for tonight’s debate. That way, you can throw things at the TV screen when both Obama and Romney flub the figures.
It must be understood what is meant by “broadening” the tax base. This means increasing the amount of income that is taxed. This is usually done by getting rid of deductions and exclusions which causes the amount of tax you pay to increase, even though the rates remain the same. The JCT’s experiment eliminated ALL itemized deductions, repealed the Alternative Minimum Tax patch, taxed capital gains and dividends at ordinary income rates and assumed that individual tax rates will rise in 2013 (that is, if you are currently in the 25% tax bracket, you will be in the 28% tax bracket in 2013).
Republicans make the argument, which is true to a point, that you can broaden the tax base by lowering tax rates. This theory assumes that as more people are put to work and unemployment falls, more income is available to tax. Think of having a cake from which the government would like to eat. If the size of the cake remains the same, and the government takes a larger slice, that means less cake for you. However, if the size of the cake doubles and the government takes a smaller slice as a percentage of the total, it may be possible to increase the amount of revenue flowing to the government (mathematically, think 25% of $100 = $25 and 20% of $200 = $40).
The other phrase to keep in mind is “revenue neutral.” Proposed changes to tax law are revenue neutral if they neither increase nor decrease the total revenue flowing to the government. So, regardless of the size of the cake, the government’s piece is fixed and does not change.
The result of JCT’s experiment was that in order to keep proposed tax changes revenue neutral, you could only lower tax rates by 4% using the assumptions made in their report. Semantically, this allows me to say that I plan to lower your taxes by 4% and keep my proposed changes revenue neutral by broadening the tax base. What I have actually done is increase your taxes. How? Remember that next year your marginal rate automatically rises from 25% to 28%. A 4% reduction in the 28% rate drops you to 26.88%. Plus, you have just lost all your itemized deductions which means that more of your revenue is taxed at the higher 26.88%. N’est pas?
The lesson? A politician who talks about lowing tax rates without providing specific examples of how tax laws would change is planning on raising your taxes.
richard watson said:
Thanks Son, very interesting. Dad