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Right-Wing Tax And Budget Myths

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by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, Ryan Powers, and Pat Garofalo

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Yesterday, the Obama administration released its fiscal year 2010 budget, which lays out an ambitious course of action on health care reform, energy policy, and education while estimating a deficit of $1.75 trillion for the current fiscal year. The budget also includes "significant tax increases" for corporations and wealthy Americans that will increase revenue by nearly $2 trillion over the next 10 years. The proposal allows the Bush tax cuts on the top two income brackets to expire on time in 2011, reduces itemized deductions for those making more than $250,000 a year, raises the top rate on capital gains and dividends to 20 percent (from 15), and closes the capital-gains loophole so that hedge fund and other private-equity managers have their profits taxed as ordinary income instead of capital gains. The budget also proposes a cap-and trade program that would auction permits to companies that emit greenhouse gases, with the revenue directed toward President Obama's Making Work Pay tax credit. As the Center for American Progress's Michael Ettlinger noted, these changes are "going to provoke outrage." But "were this budget to be enacted, it would be by far the most significant progressive step in over forty years," noted CAPAF Fellow Matt Yglesias. Conservatives are already propagating various myths about the budget; The Progress Report offers these debunks:

MYTH 1: OBAMA'S RAISING TAXES DURING A RECESSION: "If there's anything that economists on the left and the right agree on, that supply-siders, classic economists and Keynesians agree on, you don't raise taxes in a recession," said Rep. Paul Ryan (R-WI). "This budget is raising taxes in a recession." The plan drew a similar rebuke from the American Petroleum Institute, the oil industry's most powerful trade group. However, as Office of Management and Budget Director Peter Orszag said, "[F]olks need to actually look at the budget document." To avoid raising taxes during the recession, the increases will not take effect until 2011. Furthermore, the economic stimulus package signed into law by Obama last week enacted one of the largest tax cuts ever, which made good on Obama's campaign promise to cut taxes for 95 percent of Americans. The first benefits from these cuts should be seen no later than April 1, 2009.

MYTH 2: TAX INCREASES WILL RUIN ECONOMIC GROWTH: The Heritage Foundation claimed that Obama's tax proposals "sacrifice future economic growth at the altars of redistributionism," while House Minority Leader John Boehner (R-OH) called the budget a "job killer." But as Orszag said, "[W]e're returning to the tax rates that applied during the 1990's. I think all Americans -- including high income Americans -- did quite well during that decade." The Center for Budget and Policy Priorities pointed out that "what the data do show clearly is that, despite major tax cuts in 2001, 2002, 2003, 2004, and 2006, the economy's performance between 2001 and 2007 was far from stellar." As CAP's Joshua Picker found, the Bush economy "registered the weakest jobs and income growth in the post-war period. Overall monthly job growth was the worst of any cycle since at least February 1945, and household income growth was negative for the first cycle since tracking began in 1967." Women reversed employment gains of previous cycles, and for African-Americans, the worst job growth on record was matched by an unprecedented increase in poverty. Businesses didn't fare any better, as the Bush tax cuts "were actually followed by a pronounced decrease in the fraction of G.D.P. devoted to business investment." Business investment fell after both the Reagan and Bush tax cuts, but rose after the Clinton tax increase, according to work by Princeton professor Uwe Reinhardt.

MYTH 3: TAX INCREASES WILL HARM SMALL BUSINESSES: Republicans, "knowing they will get little mileage from defending the rich, instead are casting the plan as a tax hit on people who run industrious little companies driving job growth," noted the AP. "A majority of those penalized by the proposed tax increase in this budget are small businesses," said Rep. Eric Cantor (R-VA). Sen. Jim DeMint (R-SC) said the proposal "shows a lack of understanding of the private sector." But as the Associated Press pointed out, Republicans are "adrift" on this one, as "many truly small operations simply don't make enough to qualify for the tax hit." Indeed, only 1.9 percent of small businesses file in the top two federal income tax brackets, which leaves 98.1 percent unaffected by the rate change. And because of the Treasury Department's broad definition of small business, "many of the roughly 650,000 filers with small-business income who face one of the top two tax rates are merely passive investors who have nothing to do with running the business." So "the $84 of income President Bush received in 2001 from a passive investment in an oil and gas company made him a 'small-business owner.'" Overall, only 0.7 percent of households file in the top two income brackets. As Yglesias wrote, "[A]ny small businessman who's earning a middle class income isn't paying in the top two brackets, just as any salaried employee who's earning a middle class income isn't paying in the top two brackets."