Taxing issues on the US election agenda

Fri, Aug 24, 2012, 01:00

US PRESIDENT Barack Obama says he wants to return to a more equitable America, where tax reform, regulation and government support for infrastructure and education would give everyone “a fair shot”.

For Republican rival Mitt Romney, the election is about Obama’s stewardship of the economy, which he blames for the highest US debt since the second World War and budget deficits exceeding $1 trillion (€796 billion) annually.

The congressional budget office published on Wednesday its last semi-annual report on the US economy before the November 6th election. Democrats and Republicans concluded an agreement during last year’s debt ceiling crisis that would automatically raise taxes and slash government spending if they had not compromised by the end of this year. That “fiscal cliff” would have catastrophic effects, the budget office warned, including a “significant recession” and the loss of another two million jobs.

Both camps saw the report as a vindication of their policies. “We can see what’s happening over in Europe,” said Romney. “People have spent more than they have taken in, year after year after year, borrowed more and more money, made promises they couldn’t fulfil, and finally something which had to end did end.”

The White House interpreted the report as an indictment of the unfair US tax system. The Republicans “are willing to hold the middle class hostage unless we also give massive new tax cuts to millionaires and billionaires – tax cuts we can’t afford that would do nothing to strengthen the economy”, spokesman Jay Carney said.

The Obama-Biden and Romney-Ryan tax plans provide a stark contrast. Vice-presidential candidate Paul Ryan drew up the most elaborate policy, as chairman of the House budget committee. He wants to reduce six income tax brackets to two: Americans earning up to $50,000 would pay 10 per cent; those earning more than $50,000 would pay 25 per cent.

Romney’s income tax policy is slightly different. He would reduce all Americans’ income tax rate by 20 per cent, and cap the top rate at 28 per cent.

Obama would leave income tax unchanged for families living on less than $250,000 annually, but raise the top bracket from 35 per cent to 39.6 per cent.

Romney and Ryan want to repeal the alternative minimum tax, which was designed to ensure a minimum tax rate for the rich.

Obama wants to enact the “Buffett rule”, which would require any household earning more than $1 million a year to pay at least 30 per cent income tax.

Ryan would eliminate taxes on capital gains and dividends, which, as the Obama campaign points out, would reduce Romney’s tax bill to about 1 per cent of the more than $20 million his $250 million fortune generates annually. Obama would tax dividends as ordinary income, and raise capital gains tax to 20 per cent for the wealthiest.

Romney and Ryan would eliminate death duties. Obama would raise them to 45 per cent, beyond a $3.5 million exemption.

Romney claims he can balance the budget while slashing taxes by “broadening the base” for tax collection. The non-partisan Tax Policy Center says Romney’s plan would help the rich and hurt the middle class, a statement Romney dismissed as “a garbage conclusion” based on “garbage assumptions”. But to avoid alienating large numbers of taxpayers, Romney will not say which loopholes he would close.

Employer-provided healthcare insurance, pension and retirement savings, mortgage interest and gifts to charity are the exemptions that deprive the government of the most revenue.

Taxation may be the single biggest grievance of the American right. Demonstrators at Tea Party rallies often hold placards saying “Taxed Enough Already”. But according to an article by Prof Andrea Louise Campbell of the Massachusetts Institute of Technology in the autumn edition of Foreign Affairs magazine, Americans are not taxed enough.

“Compared with its counterparts among advanced nations, the US tax system collects little revenue, poorly redistributes that money across the population and is mind- bogglingly complex,” she writes.

The US ranks 32nd of the 34 industrialised countries in the OECD in terms of tax revenue as a percentage of GDP. Denmark has the highest tax ratio, at 48.1 per cent. The US rate is half that, at 24.1 per cent.

US income tax rates are not particularly low, Campbell notes. The biggest difference is the absence of value-added tax in the US, which helps to account for the fact that the US redistributes so little wealth. Other developed nations use VAT to fund social programmes.

Income inequality is aggravated by a system of tax exemptions that favours the affluent. A quarter of loopholes benefited the top 1 per cent last year, the Tax Policy Center estimates, while two-thirds of loopholes went to the wealthiest 20 per cent.

As a result of these and other inequities, Campbell writes, “despite having nearly the highest per capita GDP in the world, the US has the highest poverty rate among rich nations”.