Tax Facts: GOP Wildly Exaggerates Size of Looming Tax Hikes

By STEPHEN OHLEMACHER

WASHINGTON -- Republicans are calling it "Taxmageddon," the big tax increase awaiting nearly every American family at the end of the year, when a long list of tax cuts are scheduled to expire unless Congress acts.

It would be, GOP leaders in Congress say again and again, "the largest tax increase in American history."

Except it wouldn't be, not when you take into account population growth, rising wages, and most importantly, the size of the U.S. economy. When those factors are taken into account, the largest tax increases were those imposed to help pay for World War II -- back when the U.S. raised additional revenue to pay for wars instead of simply borrowing.

Nevertheless, it is an exaggeration that has proved too tempting for top Republicans in Congress:

• "Any sudden tax hike would hurt our economy, so this fall -- before the election -- the House of Representatives will vote to stop the largest tax increase in American history," House Speaker John Boehner (R-Ohio) said in a May 15 speech in Washington.

• "Before we leave for August, I expect to schedule a vote on legislation preventing the largest tax increase in history," House Majority Leader Eric Cantor (R-Va.) wrote in a recent memo to fellow House Republicans.

• "Millions are unemployed and millions more are underemployed and the country is facing the largest tax hike in history at the end of the year," Senate Republican Leader Mitch McConnell said Thursday in a speech on the Senate floor.

• "This would be, without any exaggeration, the largest tax increase in American history," said a May 17 letter from 41 Republican senators to Senate Majority Leader Harry Reid (D-Nev.).

Republican presidential candidate Mitt Romney gives the claim a different twist, applying it to President Barack Obama's budget proposal for next year. That's an even bigger exaggeration.

THE FACTS: A huge collection of tax cuts are scheduled to expire at the end of the year, affecting families at every income level and businesses of many stripes. Many of the tax cuts were first enacted under former President George W. Bush and extended under Obama.

If Congress does nothing, income tax rates would go up, estate taxes and investment taxes would increase and the alternative minimum tax would hit millions of middle-income people. A temporary payroll tax cut that has been of benefit to nearly every wage earner in 2011 and 2012 would expire, costing the average family an additional $1,000 a year.

In addition, dozens of other tax breaks for businesses and individuals that are routinely renewed each year already expired at the end of 2011. Congress was expected to renew many of them by January, so taxpayers could still claim them on their 2012 tax returns.

If Congress fails to act, businesses would lose a popular tax credit for research and development as well as generous tax breaks for investing in new plants and equipment. Individuals would lose federal tax breaks for paying local sales taxes, buying energy efficient appliances and using mass transit.

In all, federal taxes would increase by about $423 billion next year, according to figures from the nonpartisan Congressional Budget Office and the Joint Committee on Taxation, the official scorekeepers for Congress.

Combined with federal spending cuts scheduled to take effect next year, the one-two punch would probably send the U.S. economy back into recession, according to a recent CBO study.

Still, the tax increases would pale in comparison to those imposed to help finance World War II.

Before the 1940s, the individual income tax applied to only a small percentage of the population. By the end of war, the income tax was levied on most working people, with a top tax rate of 94% on income above $200,000.

By comparison, the current top rate is 35%, on taxable income above $388,350. If Congress does nothing, the top rate would return to 39.6% next year -- the same rate that was in place for most of the 1990s.


In dollars, next year's tax hikes would be the biggest. But the size of the economy is 80 times bigger than it was in the 1940s, which is why economists usually measure taxes and government spending as a share of the U.S. economy.

The 1942 tax increase represented more than 5% of the U.S. economy, as measured by the gross domestic product, or GDP. The 1941 tax increase was 2.2% of GDP, according to a Treasury Department paper published in 2006.

Next year's looming tax increase would represent 2.6% of GDP -- a huge tax hike but not the biggest.

Measured another way, the 1942 tax hike increased federal revenue by a whopping 71%, according to the Treasury Department paper. The 1941 tax hike increased federal revenue by 32%.

By comparison, next year's potential tax hike would increase federal revenues by 16%, according to CBO.

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ROMNEY: "President Obama has failed to even pass a budget. In February, he put forward a proposal that included the largest tax increase in history, and still left our national debt spiraling out of control, and the House rejected it unanimously," Romney said in an April 4 speech to newspaper executives and editors.

ROMNEY AGAIN: "Rapidly rising federal spending and debt threatens our economic future, and the president has responded by proposing the largest tax increase in history," Romney said in a Feb. 22 release.

THE FACTS: Obama's budget proposal would represent one of the largest tax increases since World War II, if you count letting the payroll tax cut expire as a tax increase. But again, it wouldn't be the largest ever. Obama's 2013 budget proposal mixes tax cuts designed to improve the economy with long-term tax increases aimed at reducing the federal budget deficit.

Obama has proposed extending Bush-era tax cuts for families making less than $250,000 and ending them for families that make more. He would end tax breaks for oil and gas companies but make permanent the research and development tax credit.

In 2013, Obama's budget proposal would increase tax revenue by $195 billion over current policy -- if you include the tax increase from letting the payroll tax cut expire. The tax increase would represent 1.2% of GDP. Or, measured a different way, it would increase tax revenue by 7%.

• <p> If you think Romney and Gingrich disagree about undocumented immigrants, their tax returns suggest that they're polar opposites when it comes to investing in municipal bonds to earn tax-free interest.<br /> <br /> The former speaker's 2010 return shows he earned $10,754 of tax-free interest, compared to $26,655 of the taxable variety. Romney's forms show just $557 of tax-free interest and $3,295,727 of taxable interest income.<br /> <br /> Remember, to figure the taxable-equivalent yield of a tax-free bond, divide the tax-free yield by 1 minus your marginal tax rate. Since Gingrich's marginal rate is 35%, a 3.5% tax-free yield is worth the same as a 5.38% taxable yield (3.5/0.65). Romney was hit by the alternative minimum tax in 2010, so his marginal rate was 28%. Avoiding a 28% tax makes a 3.5% tax-free rate equal to a 4.86% taxable yield (3.5/0.72).</p>
• <p> When you buy your principal residence, points you pay to get your mortgage are fully deductible on your tax return for the year you close. When it comes to a second home (or a rental property or a refinancing), however, that cost must be amortized over the life of the loan -- 1/30th a year if you have a 30-year mortgage, for example. That can lead to relatively small -- and relatively easy-to-forget -- write offs.<br /> <br /> But if you follow Gingrich's example, you won't miss this tax break. His return shows a $19 deduction for a portion of the $2,261 it cost him to refinance the mortgage on a rental property he owns in Whitehall, Wisc. Since the refi was in October, 2010, he got to write off one-fourth of 1/30th of the cost on that year's return.</p>
• <p> Anyone planning a substantial charitable gift this year should take a page from Romney's playbook and consider donating appreciated securities rather than cash.<br /> <br /> As long as you have owned the asset for more than a year, you get to deduct the full fair market value of the gift, not what you paid for it. (And neither you nor the charity ever has to pay tax on the appreciation that accrued while you owned the stock.)<br /> <br /> Romney's 2010 return shows that he and his wife, Ann, donated $1,525,167 in cash and another $1,458,807 in non-cash gifts -- much of it appreciated stock in Domino's Pizza.</p>
• <p> Even if you don't itemize deductions, you can write off alimony paid to an ex-spouse ... as long as you also include the ex's Social Security number so the IRScan make sure he or she reports the amount as taxable income. Gingrich fulfilled that requirement and deducted the $19,800 he paid his ex-wife in 2010.</p>
• <p> Tax law allows you to deduct the loss on a stock that becomes worthless, treating it as though you sold it for $0 at the end of the year in which it lost all value. That appears to have happened to at least one of Mitt Romney's investments. His return shows a $63,511 loss on shares in an investment fund that were disposed of for $0.</p>
• <p> The stock market meltdown of 2007-2009 was not kind to Mitt Romney. He suffered losses so serious that, even after wiping out all of his capital gains, he carried $4,844,089 of long-term losses over to his 2010 tax return.<br /> <br /> Remember, losses are used to offset gains dollar for dollar, but then only $3,000 of excess loss can be deducted against other kinds of income such as salary or interest income. Any excess is carried over to the next year. On his 2010 return, Romney used nearly $5 million of such losses to offset gains that would have otherwise been taxed at 15%, saving him $726,613.<br /> <br /> If you had carryover losses on your 2010 return (as the Gingriches did), be sure to revive them when you complete your Schedule D this spring.</p>
• <p> Congress has created special rules for what it calls &quot;passive activities,&quot; a group that includes most investments in real estate and limited-partnerships.<br /> <br /> Basically, losses from such investments can only be deducted against gains from similar activities. There's an exception that allows up to $25,000 of loss from rental real estate to be deducted if you are &quot;actively&quot; involved in the rental.<br /> <br /> We don't know if Gingrich is actively involved in the rental in Wisconsin, but even if he was, he would not have been permitted to deduct the $4,646 loss he reported. The $25,000 allowance gradually disappears as adjusted gross income moves between $100,000 and $150,000. With AGIof $3,142,066, Gingrich is out of luck. (He can stockpile the disallowed loss and deduct it when he sells the property.) By the way, the Romneys return shows that the passive loss rule blocked the deduction of over $2 million in losses from limited partnerships.</p>
• <p> Plenty of politicians have gotten in trouble in the past for failing to pay Social Security taxes for their child-care providers and household help. For 2012, if you pay household help more than $1,800, you are required to file a Schedule H with your return and pay Social Security and Medicare taxes for your employee.<br /> <br /> Both Romney and Gingrich included the form and paid the piper for their household help in 2010. Ann Romney reported that she paid four household employees a total of $20,603 in 2010 and paid $3,152 in taxes for them. Gingrich reported that he paid household help $14,774 and paid $2,260 in Social Security and Medicare tax.</p>
• <p> The federal income tax is on a pay-as-you-earn system. If you don't pay in enough during the year -- via withholding from paychecks or estimated tax payments -- the IRSwill slap on an underpayment penalty. Generally, you avoid the penalty if your payments during the year are at least 90% of what you owe. Gingrich owed an extra $382,734 when he filed his $2010 return, 38% of his tax bill for the year. That triggered an underpayment penalty of $1,543.</p>
• <p> The opposite side of the coin from the underpayment penalty is paying in too much doing the year. About 75% of all taxpayers are in this boat, and get tax refunds every spring. We think that's silly, and have <a href="http://www.kiplinger.com/tools/withholding" target="_">a calculator to help you match withholding</a> from your paychecks to what you'll owe for the year. Our calculator won't help Romney, though, since he has no wages from which to withhold. He overpays via quarterly estimated tax payments, and boy does he overpay! His 2010 return shows that he paid in $1,609,441 more than the $3,009,766 that he owed. He didn't ask for a refund, though. He let the IRSkeep the cash as a down payment on his 2011 tax bill.</p>
• <p> For 2010, the 6.2% employee share of the Social Security tax applied to the first $106,800 of wages. (The wage base is $110,100 for 2012; the rate is 4.2% for January and February and will jump back to 6.2% <a href="http://www.kiplinger.com/columns/taxtips/archive/is-a-payroll-tax-hike-coming.html">if Congress fails to extend the payroll tax holiday</a>.) If you work more than one job and your combined salary exceeds the wage base, too much tax will be withheld from your pay. That happened to one of the Gingriches in 2010, so they claimed a credit of $367 to reclaim the excess tax withheld.</p>
• <p> A special rule allows qualifying self-employed workers to deduct 100% of their medical insurance premiums, even if they don't itemize deductions. That might have helped Romney, who reported that he paid $14,176 in self-employed health insurance premiums in 2010. But he didn't get the tax break. Rather than claim the special deduction, Romney reported the premiums as medical expense on Schedule A, where a deduction is allowed only to the extent such expenses exceed 7.5% of adjusted gross income. Romney's $14,176 of premiums fell well short of $1,623,488 (7.5% of his AGI).</p> <br /> <p> More from Kiplinger:</p> <br /> <p> <a href="http://portal.kiplinger.com/tools/income_rank/">Nation&rsquo;s Tax Burden?</a><br /> <br /> <br /> <a href="http://portal.kiplinger.com/tools/tax_increase_calculator/">How Much Would a Payroll Tax Increase Cost You?</a><br /> <br /> <br /> <a href="http://portal.kiplinger.com/slideshow/tax_breaks_for_the_rest_of_us">Tax Breaks for the Middle Class</a></p>
• <br/ ><p> <a href="http://www.dailyfinance.com/photos/ten-states-that-cannot-pay-their-bills/4745524/"> <style type="text/css"> .hpgText .interiorPromo {display:none;} </style> Ten States That Cannot Pay Their Bills</a></p><br/ > <p> <a href="http://www.dailyfinance.com/photos/the-10-best-u-s-cities-for-raising-a-family/4749791/">The 10 Best U.S. Cities for Raising a Family</a></p><br/ > <p> <a href="http://www.dailyfinance.com/photos/companies-that-will-disappear/4775509/">Companies That Will Disappear</a></p> <p> </p>

That would rank as the fourth-largest tax increase since World War II, behind tax hikes enacted in 1950, 1951 and 1968, according to the Treasury Department paper.

Further dousing Romney's claim, House Republicans have passed a budget for next year -- which Romney has embraced -- that would raise just $7 billion less in taxes than Obama's budget in 2013. That's the equivalent of a rounding error, when you're talking about revenues of $2.7 trillion.

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Online:

Treasury paper on major tax bills since 1940: http://tinyurl.com/65r8f84