Opinion article - Obama's Stealth Tax Hike
With the on-going debt talks, here's an interesting piece from the WSJ:
The White House wants Republicans to agree to tax increases that no one wants to call tax increases, and for an insight into this political method let's focus on one proposal in particularthe phase-out of itemized deductions for upper-income taxpayers. We hope the tea party is paying attention, because this kind of maneuver is why people hate Washington.
The idea is that once taxpayers earn a certain amount of money (say, $200,000), they would begin to lose the value of the various deductions they're entitled to under the law. These include such IRS Form 1040 line items as the personal exemption, the deductions for state taxes and charitable contributions, even those for spouses and children. Earn enough money and soon the value of those deductions goes to zero.
The political point of this exercise is to raise marginal tax rates without appearing to do so. The top statutory individual rate would remain at 35%, so the politicians could claim they hadn't raised rates. But for those losing their deductions, the marginal rate would increase by between one and two percentage points until the phase-outs were complete.
We raise the alarm now because this sneaky bit of political fiddling last became law during a previous bipartisan budget summitin 1990. Democrats proposed it then, too, and President George H.W. Bush and his budget chief D.ick Darman agreed to it so they could appear to be raising tax rates less than they really were.
Those deduction phase-outs continued to be part of the tax code until the 2003 tax law finally phased out the phase-outs. They are scheduled to return when the George W. Bush tax rates expire at the end of 2012. While the statutory top rate will then rise to 39.6%, millions of taxpayers will pay a top rate closer to 41% as they lose their deductions. This is in addition to the 3.8% payroll tax increase on investment income that will hit millions of these same taxpayers when ObamaCare gears up in 2013.
Only six months ago, President Obama endorsed the extension of the Bush rates (and the end of the phase-outs) for two more years, but now his negotiators want to renege on that deal. They want to reintroduce the phase-outs as part of a debt-ceiling deal, apparently so they can claim they got Republicans to agree to some "revenue increases" in return for spending cuts. Some Republicans might be tempted to go along claiming they didn't raise tax rates.
They'll deserve only scorn if they do. Republicans will be signing on to a tax increase, and one of the more dishonest varieties at that. The phase-out gambit is an attempt to shoe-horn more progressivity into the tax code without admitting it, and to do so in such a way that only tax experts will know what's going on.
One goal of the tax reform that Republicans and Mr. Obama keep talking about is to simplify the tax code, but deduction phase-outs make the code far more complicated. Phase-outs make it impossible for taxpayers to add up their income, look at the tax tables, and know what they owe. The IRS taxpayer advocate service and even the head of the American Bar Association's tax section urged their repeal in the 1990s.
Democrats keep telling us Americans support raising taxes. If that's true, the least they can do is try to raise them honestly.