President Obama was re-elected based on his stated intention to extend the so-called “Bush tax cuts” only for middle and lower income Americans. Those with upper incomes don’t need tax cuts and it’s time to make them pay their fair share with a balanced approach to increasing revenues and reducing spending.
We’re rapidly approaching the end of the year when those tax cuts expire for everyone. If nothing is done, the tax bill for Americans next year will increase by over $400 billion, with a disproportionate share falling on those who can least afford to pay it. Not only will the middle class end up paying much higher taxes, but arbitrary spending cuts will go into effect across the board. These cuts will directly impact those who can’t find a job and who depend on the federal safety net for their very survival. Most Americans simply cannot afford the country to go over the Fiscal Cliff.
When the tax cuts were originally passed during President Bush’s first term, they contained a sunset provision that would cause them to expire on December 31, 2010. They were extended for two more years in order to win agreement to extend unemployment benefits and the payroll tax reduction. The country was in the depths of the recession and the tax cut extension was meant to be temporary. There’s no persuasive rationale to extend those cuts again for people who clearly don’t need them.
The top marginal tax rate is currently 35%, down from the prior rate of 39.6%. There’s no compelling reason why that rate can’t return to 39.6% or more for those with annual incomes exceeding $250,000. In addition to increasing the top tax rate for the rich, tax breaks that favor the wealthy and subsidies for large corporations should be eliminated.
For example, the home mortgage interest deduction favors the wealthy since deductions must be itemized in order to take advantage of the tax write-off. Many lower and middle income earners don’t have enough other deductions to justify itemizing, so they take the standard deduction instead. As a result, the mortgage write-off is not a significant incentive for them to buy their own homes, even if they could otherwise afford them. Contrast that with the wealthy who can take up to a $1 million deduction for two homes, a huge incentive for them to invest in real estate.
The Bush tax cuts reduced the maximum tax rate for long-term capital gains to 15%, allowing people with large investment portfolios to pay far less tax than middle income earners. The preferential tax treatment of capital gains is highly regressive because the rich pay less than half the top tax rate as compared to ordinary income.
Capital gains are highly concentrated because most are earned by the top 10% of incomes. In fact, those with incomes over $1 million realize about 70% of the tax benefits. The tax savings for those high earners will amount to almost $40 billion this year alone. The capital gains rate should be increased to at least 35% for those in the high income bracket.
It’s also time to end the generous taxpayer subsidies for the oil industry. The three biggest oil companies reaped daily profits of $220 million in 2011, totaling $80 billion for the year. Companies with oversized profits like those don’t need tax write-offs of any size.
The rental cost of the Deepwater Horizon oil rig used by BP in the Gulf of Mexico was eligible for a tax deduction of $225,000 per day. This amounted to a 70% savings for BP which leased the rig from Transocean Ltd. The taxpayers should not be subsidizing environmentally destructive companies that can afford to pay lease costs on their own.
Another tax break that should be eliminated is the special treatment accorded performance fees earned by hedge fund managers. Their argument that compensation is based on the gains in their funds ignores reality. They earn those fees whether the fund gains are based on their personal performance, or simply because the overall market went up during the year. The fees are a compensation for services and should be treated as ordinary income, not capital gains.
When it comes to fair tax policy, Congress has kicked the can down the road long enough. It’s time to step up to the plate and pass real reforms that raise rates on the rich and eliminate tax loopholes that benefit them disproportionately. Let’s make oil companies pay their own way by eliminating subsidies that have long outlived their usefulness.
The Bush tax cuts and payroll tax reduction must be extended only for those families making less than $250,000 per year. Without additional revenues, we’ll have to start cutting programs that benefit those who can least afford more cuts. Without immediate action on the items above, the risk of another recession and higher unemployment remain extremely high. Your strong support and vote for our positions are respectfully requested.