Playing The Tax Compromise Number Game

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Here is Anthony Weiner, a Congressional black belt in cable news combat, making waves on Fox News yesterday. You don’t have to watch the whole thing. But note at about 1:25 when he says. “Is it best to add another $80 billion in debt to our children to pay for the Estate Tax burden that will only be lifted for 32,000 people in the entire country?”


It’s quite a stat. But it also is misleading. Weiner is comparing the compromise proposal, which sets rates at 35% with a $5 million exemption, with what is known as “current law,” the rates that will rule if Congress goes home today and does nothing: 55% with a $1 million exemption. But these are not the numbers that matters. Why?

Long before the current deal, President Obama signaled that he did not support setting the Estate Tax that high. In fact, Congress had already budgeted, in the PAYGO exemption, for an Estate Tax at the numbers that Obama, and many Democrats, do support: 45% and a $3.5 million exemption. So absent any phone calls between Joe Biden and Mitch McConnell, in a universe where Obama was king and not president, this was the rate that could be expected next year. What is the cost of lowering the rates from 45% to 35% and raising the exemption from $3.5 million to $5 million? Both the White House and Moody’s estimate it to be about $12 billion a year, or $24 billion over two years. Still a big number, but just a fraction as much as the number Weiner was using.

Working out the baselines is a huge problem in the debate over taxation. All sides tend to choose the baselines that best serve their case, confusing the discussion. You have probably heard that this whole package could cost as much as $800 or $900 billion, which is true, but only if you assume that Congress did absolutely nothing and all rates went up for everyone, an outcome no one in Congress supports. If you take out the consensus costs, like extending the Bush-era tax cuts for about 98 percent of Americans, then you get a cost to the McConnell-Obama deal that is closer to $400 or $500 billion. (Ezra Klein has posted a handy pie chart showing the share of the various provisions. See here.)

This same issue comes into play if you want to calculate your own personal tax from the tax cut compromise. (Because who doesn’t? Read on.) The Tax Policy Center, a nonpartisan, academic group, put forward estimates for the tax savings for the average family under the deal, but they calculated all of their numbers twice to show the effect on different baseline assumptions.

If you assume current law, which means that Congress does nothing, not even the tax cut extensions that basically everyone supports, the effect of the Obama-McConnell compromise is pretty large. Households with income in the $40,000 to $50,000 range would save an average of $1,679. Those in the $75,000 to $100,000 range would save an average of $3,486. Those in the $500,000 to $1 million range would save an average of $24,894. But again, this assumes that the alternative is that none of the Bush-era tax cuts or perennial tax cuts like the Alternative Minimum Tax adjustment get extended, which is simply not a realistic political assumption.

If one compares the tax compromises effect to the current policy–assuming that the Bush Tax cuts. the AMT, the Estate Tax at Obama-supported levels, current tax credits, etc., are extended–then one gets another read on the impact of the Obama-McConnell compromise. Households between $40,000 and $50,000 get an average of $810 more. Households between $75,000 and $100,000 get an average of $1,415 more. And households between $500,000 and $1 million get an average of $3,765 more.

But this calculation doesn’t tell the whole story either, because it assumes a lot of things that are not consensus, like extending the tax credits most Republicans oppose and extending the Bush-era cuts for the wealthy that most Democrats oppose. Unfortunately, the Tax Policy center has not scored a comparison of the ideal Republican plan and the ideal Democratic plan, so you don’t have hard numbers to show the difference between the party’s proposals.