Hatch: Raising Taxes By Cutting Tax Expenditures For Deficit Reduction is ‘Dog That Won’t Hunt’
WASHINGTON – In a speech on the Senate floor today, U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee (R-Utah), slammed the Obama Administration’s decision to raise taxes by cutting tax expenditures to achieve deficit reduction, will be a “bull’s eye on the backs of middle class American families.” This speech is the third in a series Hatch has delivered on so-called tax expenditures.
Following are excerpts from Hatch’s speech:
On Why Tax Hikes “On the Rich” Won’t Restore Fiscal Order:
“Tax increases on the wealthy will not get our nation to fiscal balance. Even if we let the Bush tax breaks expire for the top income bracket, the total amount raised over ten years would be $615 billion. Yet our deficit this year alone is $1.5 trillion. And this is why the issue of tax expenditures is critical. Democrats talk about tax expenditures as though they are the holy grail of deficit reduction. Just close these loopholes, and happy days are here again. I am not going to let them get away with this. Cutting back tax expenditures is a convenient way for Democrats to tax middle class taxpaying families and small businesses without having to say they are raising their tax rates.”
On the “Lion’s Share of Tax Expenditures”:
“The lion’s share of tax expenditures go to that part of the middle class that is already shouldering much of the nation’s tax burden. Most tax expenditures are either income limited or of limited value to wealthy taxpayers. Likewise, low income families don’t pay income tax. They receive tax expenditures that are designed for the non-taxpaying population. So, who is left? The answer is the taxpayers who are not rich by the President’s definition. The answer is middle class families.”
On Current Deficit Reduction Negotiations:
“Contrary to the President’s vague assertions, the left wing base that he is depending on for his reelection, refuses to any meaningful structural reforms to the spending programs that are bankrupting the country. That means that the only serious deficit reduction option available to Democrats is massive tax increases on the middle class. Democrats won’t acknowledge the inevitable tax increases that their agenda assumes, and Republicans won’t give the President any cover in this drive to “spread the wealth around.” That is what is holding up this process.”
On Why Cut Backs in Tax Expenditures Will Not Achieve Real Deficit Reduction:
“Instead, he [President Obama] and his party sit around and spread the myth that simply getting rid of tax expenditures and loopholes will fix our problem. We have two reasons to worry about that wrong-headed approach. One, to the extent deficit reduction energies are diverted to cutting back tax expenditures, pressure is taken off the root cause of the deficit and debt problem. That is, pressure that should be brought to bear on out-of-control spending programs, is released. Two, the productive sectors of the economy — workers, small business owners, and investors — are burdened with yet more in federal taxes. For many reasons, cutbacks in tax expenditures are a deficit reduction “dog that won’t hunt.”
Below is the text of Hatch’s full speech delivered on the Senate floor this afternoon: Mr. President, in recent days, I have spoken several times on the matter of tax expenditures. I am going to address this subject again today. It is a timely topic. Everybody is talking about our out-of-control deficits and debt. There are divergent opinions on how best to deal with our nation’s increasingly perilous fiscal situation.
But there is one thing that everyone seems to agree on. Both the deficits and debt are unsustainable. If we keep going down this fiscal path, the U.S. will face a crisis similar to that in Greece, and sooner rather than later.
The numbers could not be clearer. Federal spending, as a share of our economy is trending at a pace 15 to 20 percent greater than its historical average of 20.6 percent of GDP. If we leave in place this year’s level of taxation, including the marginal rate relief of the 2001 and 2003 tax cuts, and patch the Alternative Minimum Tax — or AMT — the federal tax take will equal or exceed its historic share of the economy.
Liberals suggest that the deficit and debt problem can only be resolved with a significant tax increase. This is either deliberately misleading or sadly delusional. They are either selling snake oil to the American people, or they refuse to come to grips with reality.
But sticking your head in the sand is not an option here. The markets, and the American people, understand the nature of our crisis. Non-defense discretionary spending is at historic levels. And our entitlement programs are headed for bankruptcy. When former-Speaker of the House Nancy Pelosi responded to the utter failure of President Obama and congressional Democrats to come up with a Medicare reform plan, she responded, “[w]e have a plan. It’s called Medicare.”
That attitude is a recipe for bankrupting the nation, a bankruptcy that would take our seniors down with it. The left might prefer to ignore reality. But here is the undeniable truth — our nation faces a spending crisis that tax increases cannot fix. I wish that the media would get this.
They are so enamored with the idea of a grand bargain on deficit reduction — a little spending reduction here, a little tax increase there — that they miss a fundamental point. The problem is spending, and going back to the dry well of raising taxes on the rich is not going to work. The fact that Democrats in the Senate have not put forward a budget in over 800 days — neglecting one of their core constitutional functions — is all the evidence we need that they are afraid of this reality. They understand that their hard left base will not accept structural changes to our biggest spending program s under any circumstances. But they also understand that the American people will not stomach for a minute the tax increases that would be necessary in the absence of such reforms.
This is a difficult position to be in. So rather than deal with facts, they traffic in obfuscation. This morning, I heard the ranking Democratic member on the House Budget Committee following the President’s lead and suggesting that removing some tax breaks for energy companies would fix our deficit crisis.
Getting rid of those tax breaks would raise $21 billion over ten years. Yet this year, we have a projected budget deficit of $1.6 trillion. Last week, I came under fire for stating what I thought to be a relatively non-controversial fact. Here is what I said. In 2009, 51 percent of Americans had zero or negative income tax liability. Here’s what that means. In 2009, only 49 of tax units shouldered 100 percent of the nation’s tax burden. And 51 percent of tax units either owed nothing to the IRS, or better yet, got money back from the IRS in excess of their tax liability.
This should be no less controversial than saying the sun rises in the east. This is not conjecture. It is demonstrable fact. Yet, it apparently touched a nerve, because last week, after raising this issue on the Senate floor, MSNBC and the liberal blogosphere — presumably armed with talking points from the Senate Democratic war room — went ballistic, suggesting that I wanted to balance the budget by raising taxes on the poor.
I am not surprised, but this completely misses the point. And the point is this. No matter what Democrats tell you, the wealthy and middle class are already shouldering 100 percent of the nation’s tax burden, and 51 percent pay absolutely nothing. Furthermore, because of this perverse distribution of federal income taxes, there is no way to fill our deficit hole and start paying down the debt by increasing their share of the load even more.
Here is the bottom line. All of the left’s talk about taxes on the rich, and closing loopholes, and going after corporate tax breaks is meant to divert attention from the sad fact that the President’s out-of-control spending puts Democrats in a position of having to raise big time taxes on the middle class if they are going to balance the budget without structural reforms to our biggest spending programs.
Tax increases on the wealthy will not get our nation to fiscal balance. Even if we let the Bush tax breaks expire for the top income bracket, the total amount raised over ten years would be $615 billion.
Yet our deficit this year alone is $1.5 trillion. And this is why the issue of tax expenditures is critical. Democrats talk about tax expenditures as though they are the holy grail of deficit reduction. Just close these loopholes, and happy days are here again. I am not going to let them get away with this.
Cutting back tax expenditures is a convenient way for Democrats to tax middle class taxpaying families and small businesses without having to say they are raising their tax rates. As I noted last week, this is what we are talking about when Democrats discuss tax expenditures.
They are talking about your pension. They are talking about your Medicare. They are talking about your ability to purchase a home, or save for retirement, or give to your church, or put away money for your children’s education.
That is what we are talking about. That is where the money is. It is not in bonus depreciation for corporate jets. And it is not in tax benefits for energy companies. When Democrats talk about tax expenditures and tax loopholes as a way to bring down the deficit and debt, they are putting a bull’s eye on the backs of middle class American families.
We heard a lot this morning about Republicans walking away from the President’s grand bargain on deficit reduction. Well, I know that the people of Utah applaud Speaker Boehner for not signing onto this bogus deal. This morning, the President’s allies in the media were out asking why Republicans walked away from this deal. With the President willing to put entitlement spending on the table, why aren’t Republicans willing to put taxes on the table.
First, it is worth noting that the President and his Democratic allies steadfastly refuse any structural changes to entitlement spending. And second, for Democrats, putting taxes on the table — and tax expenditures — means tax increases on the middle class. And that is a non-starter. This issue of tax expenditures is confusing and demands greater clarity. As Ranking Member of the Finance Committee, it is my responsibility to clear the record on what the curtailment or elimination of tax expenditures would really mean for taxpayers and families.
If you listen to my friends on the other side of the aisle, you would think tax expenditures are “spending through the tax code.” You would also think they are mostly loopholes in the tax law designed by and for special interests like ethanol blenders. Another mantra you will hear too often uncritically reviewed by many in the media is that tax expenditures disproportionately benefit wealthy taxpayers.
A few days ago, I talked about what tax expenditures are and what tax expenditures are not. They are not spending. And they are not, in the main, loopholes for special interests. Just the other day, I talked about the major features of families’ financial planning that would be upended if tax expenditures were curtailed. I referred to employee pension plans like 401(k) accounts. I also mentioned charitable gifts and home ownership. If my friends on the other side are successful in cutting back tax expenditures, American families, workers, and investors can expect the cost of all of these activities to rise. If the cost rises, as a nation, we will be poorer because we will have less retirement savings, fewer charitable contributions, and more expensive home ownership.
Today, I’m going to consider the oft-repeated line that tax expenditures disproportionately benefit wealthy taxpayers. For purposes of this discussion only, I’ll adopt the President’s definition of rich. That is singles with adjusted gross incomes over $200,000 per year and married couples with incomes over $250,000 per year. I want to be clear that I do not lump all of these folks in with Bill Gates, Jr., LeBron James, Warren Buffet, or Gilligan’s Island’s resident millionaire, Thurston Howell III.
I am using the President’s definition of rich because most of my friends on the other side use it. They also claim tax expenditures reside disproportionately with rich taxpayers. The Democrats’ rhetoric on expenditures does not jibe with the reality of our tax code. The data is clear. Tax expenditures tend to skew towards taxpayers below the President’s definition of the rich. If my friends on the other side examine the data, they will find that their assertion about who benefits from tax expenditures does not square with the facts. They will find that their assertion that tax expenditures disproportionately benefit the wealthy falls flat on its face.
In much of the coverage of tax expenditures, it has been taken as an article of faith that they disproportionately benefit wealthy taxpayers. Similar assertions have come from the White House and Congressional Democrats. The one exception is my friend, the Ranking Democrat on the Ways and Means Committee, Sander Levin. Congressman Levin has cautioned against treating tax expenditures as rich person’s tax benefits. His position is well-founded.
The source for this assertion that tax expenditures are tax benefits for rich people is a Tax Notes article, dated May 3, 2011. I ask unanimous consent to insert it in the record. The article is written by Mr. Roberton Williams of the Tax Policy Center — or TPC. TPC is a tax policy think tank that is a product of two center left think tanks. The article presents conclusions from a TPC distribution analysis of tax expenditures. The analysis concludes that about two-thirds of tax expenditures benefit the top quintile of households in the study.
Viewers on C-SPAN may wonder what a quintile is. It refers to a fifth of a given population. The TPC analysis is, therefore, measuring the top fifth of the population. According to that study, where does the top fifth of the population begin? It begins at $123,000 of household income. It should be noted that household income is a bit broader than the adjusted gross income which is the basis of the President’s definition. According to TPC, that top quintile earns 55 percent of income and shoulders a huge amount of the federal tax burden. They say it is 67 percent. I have a chart here that shows the TPC data.
Perhaps not surprisingly, TPC finds that tax expenditures for the top quintile approximate that top fifth’s share of the tax burden. With the exception of the refundable credit tax expenditures, a taxpayer has to pay income tax to benefit from a tax deduction, credit, or exclusion.
Those asserting that tax expenditures are mainly wealthy taxpayer benefits are principally relying on TPC’s distribution analysis. If confronted with the TPC data, it seems to me they have four choices.
Their first choice could be to revise downward the income basis of their definition of rich. They could say we really did not mean families at $250,000 of income. We meant families at $123,000 of income. That would be similar to the adjustment made for ObamaCare. Joint Tax distribution tables for ObamaCare showed that for every family below $200,000 that received an exchange credit, four families paid higher taxes.
A second choice would be to revise the proportion of tax expenditures so that the tax expenditure dollar amount reflects the benefits attributable to the taxpayers defined by the President as rich. The President’s rich taxpayer definition is the top 3 to 5 percent of taxpayers. It means the group of taxpayers is roughly 25 to 33 percent of the size of the group in the TPC analysis. Put another way, the TPC population of “rich” taxpayers is three to four times the size of the group the President and my friends on the other side define as rich. If a consistent definition of the rich were used, the dollar amounts of tax expenditures in play would be considerably lower. Since the goal of the group pushing the cutback of tax expenditures is to relieve spending constituencies of the pressure of curtailing spending, my guess is they will not choose to reduce the tax expenditure kitty.
Their third choice would be to sharply curtail or eliminate tax expenditures for higher income taxpayers. This course of action could largely eliminate the preferential rates for capital gains and dividends. Let’s take another look at the chart with TPC data. It shows a big share of the capital gain tax expenditure goes to the top fifth.
It looks like about 95 percent of the tax expenditure accrues in the top fifth. You’ll see that about 50 percent of it accrues to the top one-tenth of one percent. Do we think it would make sense, in the current economic climate to double or triple the tax hit on investment? At one point at least, the President’s answer was no. In August 2009, the President was asked by a resident of Indiana, “[e]xplain how raising taxes on anyone during a deep recession is going to help with the economy.” Here was the President’s response. “First of all, he’s right. Normally, you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is – his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”
So what is their fourth choice?
Their fourth choice would be coming clean with the American People. Under this option, they would admit that tax expenditures disproportionately go to families who are not rich under the President’s definition. They would acknowledge that cutting back tax expenditures as part of a deficit reduction exercise would hit the middle class and betray the President’s promise not to raise taxes on middle class families and small businesses.
There is additional evidence that that those who advocate tax expenditure cutbacks might find themselves in political quicksand. I would ask my friends on the other side to take a look at the Joint Tax distribution tables on many of the major tax expenditure categories. Joint Tax publishes these tables every year. It is available on the Joint Tax website.
I have a chart that summarizes the percentages of tax expenditures that go to taxpayers under $200,000. That’s the breakpoint that Joint Tax uses. It closely squares up with the definition of rich used by the President and his liberal allies. Anybody above $200,000 is rich under my Democratic friends’ definition. Anybody under $200,000 is not rich. You can find this data in the tax expenditures pamphlet published annually by the non-partisan Joint Tax staff.
The chart lists the tax expenditures that Joint Tax distributes by income. I have listed them in the order, from the largest in dollar volume down to the lowest in dollar volume. The first one is well known to tens of millions of our constituents. It is the mortgage interest deduction. If a taxpayer saves up a down payment and borrows for a home they can take the interest paid on the mortgage as an itemized deduction. The chart says 30 percent of the benefit of the mortgage interest tax expenditure goes to taxpayers over $200,000. Taxpayers with income below $200,000 receive 70 percent of the benefit of the mortgage interest deduction.
How do we measure whether the mortgage interest deduction disproportionately benefits taxpayers over $200,000? Take a look at the bottom of the chart. There is a line in bold letters, and it reads “Compare Total Federal Tax Burden.” That is the baseline of how much tax is shouldered by the group of taxpayers above and below $200,000. We have a very progressive tax system. Taxpayers earning more than $200,000 shoulder 64 percent of the tax burden. Taxpayers earning less than $200,000 shoulder 36 percent of the tax burden.
Taxpayers earning less than $200,000 receive 70 percent of the mortgage interest deduction while shouldering 36 percent of the tax burden. That means, by a ratio of almost 2 to 1, taxpayers under $200,000 benefit from the mortgage interest deduction. Since $200,000 basically fits the definition of rich used by my friends on the other side of the aisle, we can see that other taxpayers, the non-rich or middle income group, disproportionately benefit from the mortgage interest deduction.
Let’s take a look at the second tax expenditure on this lest. I’m referring to the earned income credit, or EIC. It is a refundable credit. That means taxpayers receive it whether they pay income tax or not. That is why the credit is basically scored as spending by the Congressional Budget Office — the CBO — and Joint Tax. There’s a bit of irony about this tax expenditure. Because it’s refundable, it is more popular with my friends on the other side than other tax expenditures. And that is because those other tax expenditures go to taxpayers who actually pay income tax. The refundable credit is popular with my friends on the other side because it is a robust income re-distribution mechanism. President Obama, in his famous exchange with Joe the Plumber, best expressed the Democrats’ economic theory and tax policy — we need to “spread the wealth around.”
Here’s the irony. My friends on the other side derisively describe all tax expenditures as “spending through the tax code.” Yet the tax expenditures they most support are the refundable ones, like the earned income credit. It should come as little surprise that the left’s favorite tax expenditure is the one that is scored as spending by Congressional scorekeepers.
Because the earned income credit tax expenditure is refundable, you shouldn’t be surprised to find that so-called rich taxpayers do not benefit from it. The chart confirms this point.
The third tax expenditure is the current $1,000 per child tax credit. It is, by definition, limited to lower and middle income taxpayers. We should not be surprised to find that none of it goes to higher income taxpayers. The chart confirms this point.
Let’s take a look at state and local taxes. It is the fourth one on this list. The chart shows that 50 percent of this broad-based deduction goes to middle income families.
Number five on the list is a tax benefit near and dear to many of my fellow Utah families. It is the itemized deduction for charitable donations. Of all of the tax expenditures listed on this chart, this one distributes in the highest proportion to taxpayers above $200,000 in income. The chart says 55 percent. But keep in mind, overall, taxpayers with income over $200,000 bear 64 percent of the tax burden. This means, proportionately, the charitable deduction benefits taxpayers under the $200,000 level more than taxpayers above $200,000 level.
Let’s take a look at number six on the chart. It is the tax-free portion of Social Security benefits. If you listened to my friends on the other side, you might think that Social Security should not be part of the deficit reduction talks. Anyone advocating a cutback on tax expenditures is advocating a cutback on the after-tax Social Security benefits for a big chunk of the senior population. And guess what? We’re not talking about wealthy seniors. According to this chart, 2% of that favorable tax treatment of Social Security goes to seniors with incomes over $200,000. My guess is that not a lot of the seniors benefitting from this policy own yachts or regularly fly in corporate jets.
Number seven is the itemized deduction for real property taxes. I know my friends from some of the so-called Blue States hear a lot about high property taxes in those states. Right now their constituents take the edge off that heavy local tax hit with the itemized deduction. If many of my friends on the other side have their way and hack away or eliminate tax expenditures without also cutting their constituents’ federal tax rate, guess what happens? In the case of local property taxes, the net effect will be to raise the property tax rate by as high as 35 percent. Some of my friends may say that only those with villas are taking the property tax deduction. The chart says otherwise. It says 80 percent of the real property tax benefit goes to taxpayers under $200,000.
How about number nine on the list? It is the itemized deduction for medical expenses. ObamaCare cut back that one. But, if my friends on the other reduce or eliminate side tax expenditures to avoid dealing with out-of-control government spending, this deduction will be cut back more. The chart shows that 89 percent of this tax benefit goes to taxpayers earning less than $200,000.
Number ten is the dependent child care credit. This is a modest tax credit that working moms and dads can tap. Like the child tax credit, it mainly is used by middle income families. The chart confirms it. It indicates that 96 percent of the benefits of this credit go to families earning less than $200,000.
The final item on the list is the student loan interest deduction. This tax benefit is income limited. Not surprisingly, all of the benefit goes to taxpayers earning less than $200,000. I don’t think a lot of the recent college graduates using this deduction are in the market for a yacht. But if you listen to my friends on the other side, you would think because this benefit is labeled a tax expenditure, that they have a schooner docked in the local harbor.
Mr. President, I’m not saying that only middle income families benefit from tax expenditures. Wealthy taxpayers benefit from the lower capital gains and dividends rates. Low-income taxpayers benefit from the plentiful and generous refundable credits like the earned income credit.
The lion’s share of tax expenditures go to that part of the middle class that is already shouldering much of the nation’s tax burden. Most tax expenditures are either income limited or of limited value to wealthy taxpayers. Likewise, low income families don’t pay income tax. They receive tax expenditures that are designed for the non-taxpaying population.
So, who is left? The answer is the taxpayers who are not rich by the President’s definition. The answer is middle class families.
On our side, the reaction to all these choices would be simple. Many on our side, including Ways and Means Committee Chairman Camp, have put it this way. Keep your hands off tax increases, including cutbacks in tax expenditures, for deficit reduction. Reserve those tax expenditures for tax reform. In that way, taxpayers receive a benefit — lower rates, in exchange for a broader base. That broader base would include reform of tax expenditures.
Any other approach is just another tax increase. The President this morning gave another press conference. It was a sorry display. He asked what the hold up was in arriving at a deficit reduction compromise. The answer seems pretty obvious.
Contrary to the President’s vague assertions, the left wing base that he is depending on for his reelection, refuses to any meaningful structural reforms to the spending programs that are bankrupting the country.
That means that the only serious deficit reduction option available to Democrats is massive tax increases on the middle class. Democrats won’t acknowledge the inevitable tax increases that their agenda assumes, and Republicans won’t give the President any cover in this drive to “spread the wealth around.” That is what is holding up this process.
Instead of berating Republicans for not signing onto historic and economy crushing tax increases when unemployment is at 9.2 percent, maybe he should take his own part to the woodshed. Maybe he should ask the liberals in his party who refuse any meaningful structural reforms to entitlements to get serious. Maybe he could go on television and explain to the American people that we have over $60 trillion in liabilities, and that all the tax increases in the world will bring that into balance.
Instead, he and his party sit around and spread the myth that simply getting rid of tax expenditures and loopholes will fix our problem. We have two reasons to worry about that wrong-headed approach. One, to the extent deficit reduction energies are diverted to cutting back tax expenditures, pressure is taken off the root cause of the deficit and debt problem. That is, pressure that should be brought to bear on out-of-control spending programs, is released. Two, the productive sectors of the economy — workers, small business owners, and investors — are burdened with yet more in federal taxes. For many reasons, cutbacks in tax expenditures are a deficit reduction “dog that won’t hunt.” I yield the floor.
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