WASHINGTON – You didn’t win the Powerball, but imagine a much higher-stakes challenge: collecting $1.6 trillion from your fellow citizens.
This money isn’t for you. It’s what President Obama says he wants to collect for the good of the nation, as he works with Congress to shrink expected federal deficits and pull us off the brink of a “fiscal cliff” that could send the economy tumbling into recession next year.
The trouble is, you won’t be collecting this $1.6 trillion from people who think they might win, oh, a half a billion if they just throw you a couple bucks. You will be taking it from your fellow citizens – most likely people who make $250,000 or more a year and who probably will be less than thrilled about paying more in taxes, which is what you will be asking them to do.
If you think people earning more than $250,000 are fat cats, well, there’s more than one way to skin a fat cat. You can raise their tax rates, as President Obama wants to do. Or you can limit their deductions, as some Republicans suggest.
But just try doing it, as the president insists we should as he works with Congress to steer the nation away from that fiscal cliff, which would raise nearly everyone’s taxes and deeply cut federal spending on Jan. 1 unless a deal is struck by then.
And when you try, you will find two big problems.
First and worst of all, just raising rates as the president suggests won’t get you to $1.6 trillion, and neither will limiting deductions.
“It’s probably not a one-or-the-other,” said Joseph Rosenberg, a research associate at the nonpartisan Tax Policy Center. “It’s probably a both.”
But even if you both raise rates and limit deductions on those earning more than $250,000, there’s another problem.
Nobody likes to get skinned.
And for that reason, many tax experts say any final fiscal cliff deal is likely to extract far less in new taxes than Obama’s goal of $1.6 trillion.
But let’s give it a try. Let’s see how hard it really is to raise taxes by that amount.
Based on what you’re hearing or reading in the news, you might think this debate is all about Obama’s proposal to let income tax rates increase back to their Clinton-era levels for individuals making more than $200,000 and families earning above $250,000.
If only it were that easy.
Let’s say we raise the rate on families who make more than $250,000 a year from 33 percent to 35 percent, and the rate on those making more than $390,050 a year from 35 percent to 39.6 percent. Those are the Clinton-era rates that Obama wants.
What does it get us?
Only about a quarter of the money Obama is seeking.
According to the nonpartisan Tax Policy Center, that tax hike on the well-paid would pull in a mere $442 billion over a decade.
That being the case, Obama proposes much more than just raising the top two tax rates.
For one thing, he wants to raise taxes on capital gains from 15 percent to 20 percent. He also wants to abandon the 15 percent rate for dividends and tax them as ordinary income – meaning, in many cases, the rate on dividends would more than double.
Those changes would pull in another $242 billion.
And while you don’t hear much public screaming about that, Obama’s soak-the-investors approach has conservative economists deeply worried.
“Raising the top two rates is less of a concern to me than raising the capital gains and dividend rates,” said Stephen Entin, senior fellow at the right-leaning Tax Foundation.
Those increases would discourage investment and dampen the economy, he fears.
Still, those higher rates show the Obama proposal for what it is: a grab-bag of tax changes that adds up to $1.6 trillion.
Changes to the personal exemption and other adjustments for the highly paid would pull in another $165 billion. Returning estate taxes to their 2009 levels would yield another $119 billion.
Yet after all that, we’re still about $632 billion short of Obama’s goal.
So how do we get to $1.6 trillion?
All we have to do is listen to billionaire investor Warren Buffett (owner of The Buffalo News) and slap an alternate tax on millionaires to ensure that they pay at least 30 percent of their income in taxes, right?
Nope, not even close.
According to the nonpartisan Joint Committee on Taxation, the “Buffett Rule” will raise a paltry $47 billion over a decade.
So how does Obama reach his goal?
If he gets his way, we won’t know till next year.
He’s proposing that Congress rewrite the tax code by next Aug. 1 to save another $600 billion.
That rewrite is expected to go after some of the many deductions and other breaks that individuals and businesses now get. But so far, there are no details save for one: find $600 billion in that tax code rewrite, and presto, you’re at $1.6 trillion.
Alas, there’s still one big problem with Obama’s multipronged tax solution.
Republican leaders flat-out reject it.
“I used to be a small business owner,” said House Speaker John Boehner, R-Ohio. “Small business owners are regular men and women from all backgrounds, who in today’s economy are facing challenges on a daily basis. The president’s tax increase would be another crippling blow for them while doing little to nothing to solve the bigger problem here, which is our national deficit and our national debt.”
OK, then, let’s look at an alternative that Republican Mitt Romney proposed while challenging Obama in last month’s presidential election: a cap on itemized deductions of $25,000.
The Tax Policy Center said it’s an idea that would primarily soak the rich and raise upwards of $1.2 trillion over a decade – still about $400 billion shy of Obama’s tax goal.
That’s $1.2 trillion if you limit everybody’s deductions to $25,000 – meaning some middle-income wage-earners will see their taxes go up, too, which is something neither Democrats nor Republicans want to happen.
So what if we cap deductions at $25,000 just for those high-income taxpayers that Obama wants to hit with higher rates?
Do that and the amount such a deduction limit would collect would shrink to $800 billion over a decade, the White House said in a report last week.
But wait: Is it fair to allow a taxpayer earning $249,000 to deduct to his heart’s content while people earning just a thousand dollars more would be able to deduct only $25,000?
That means a $25,000 deduction limit would have to be phased in: the more you make, the less you could deduct. But such a phase-in could shrink the amount of money collected by another $150 billion over a decade.
So now we’re down to $650 billion – but that’s assuming that the special interests that benefit from the current deductions don’t try to stop such a limit from being enacted.
In the realpolitik of the nation’s capital, though, the protests are likely to be loud.
The health insurance industry will object to any limits on the deductibility of employer-sponsored health insurance.
The real estate industry will object to any limits on the deductibility of mortgage interest.
States like New York, which see their sky-high state and local taxes in effect subsidized by a federal deduction that covers them, will object, too.
Add it all up, and a strict limit on deductions – or their repeal, as some suggest – is “a dramatic change,” said Chuck Marr, director of federal tax policy at the Center for Budget and Policy Priorities, a left-leaning Washington think tank.
“Politically, it’s just unrealistic,” he said.
Any tough cap on deductions is expected to run into especially strong objections from the nation’s tax-exempt charities, and for good reason.
People don’t have much control over the size of their tax-deductible mortgage interest or state and local taxes. But if they’re worried about bumping into that deduction cap, they can easily cut back on the amount they give to charity.
Knowing that, experts at the Tax Policy Center and elsewhere have calculated that charitable giving might be excluded from the $25,000 cap.
Do that, though, and you lose another $200 billion over a decade, meaning this hypothetical cap on deductions now pulls in only about $450 billion, the White House said.
If this deduction cap is starting to sound a little too complicated to you, you’re not alone.
“There are deductions that people really need and like,” said Sen. Charles E. Schumer, D-N.Y. “A lot of charities depend on the charitable deduction. A lot of homeowners depend on the mortgage interest deduction. (Limiting) these could really discombobulate our economy in ways that raising the top rate would not.”
Is there a solution?
What to do, then?
Well, Congress will probably do less.
If Republicans move off their no-new-taxes stance, they’re likely to accept no more than $1 trillion in new revenues over the next decade, Capitol Hill insiders say.
In this scenario, the top rates may go up a tad, but not to the levels Obama seeks, while deductions would be limited in some form.
But that’s a big if, given that both Obama and Boehner now seem to be standing firm in opposite corners of the debate.
“It certainly doesn’t seem to help for Republicans and Democrats to keep emphasizing the tax policies they would each choose to implement if they were king of the world,” Diane Lim, chief economist at the budget-watching Concord Coalition, said in a blog post last week.
Given the state of the standoff, many in Washington think Congress will do what it often does: make like the Buffalo Bills and punt.
The current debate is really just about averting the fiscal cliff, said Leonard E. Burman, a Syracuse University professor and author of the book “Taxes in America: What Everyone Needs to Know.”
Given that Congress and the president now have less than a month to strike a deal, he agrees with many in Washington that any agreement will be a temporary fix.
And as part of it, just as Obama is suggesting, lawmakers may well set a deadline sometime next year by which time they will vow to really reform the tax code. Only then will they will look at tax breaks item by item to decide which are worth keeping, rather than settling on the comparatively blunt instrument of a deduction cap.
Of course, the debate over tax reform could lead us right back to where we are now: with Washington facing a self-imposed deadline to avert a congressionally created crisis.
“They could well set up the same sort of thing to happen again in a year,” Burman said.
So are you ready? It seems that plans may already be in the works for “Fiscal Cliff II: The Sequel.”