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Gingrich tax ‘plan’ starves government, feeds the wealthy, rests on flawed assumptions

by Linda Beale

Gingrich tax ‘plan’ starves government, feeds the wealthy, rests on flawed assumptions

In case you hadn’t heard about it, Gingrich would offer taxpayers a choice to pay tax under current policy or at a 15% rate, with zero taxation of capital gains, dividends and interest that accrues mostly to the rich and uberrich, while corporate tax rate would be reduced to a mere 12.5%.  For the rich, the 15% rate on their ordinary income and the 0% rate on their predominant form of income (capital gains and income from capital) would be a windfall.  For corporations, it would practically amount to the elimination of the corporate tax.  It should be no surprise that tax revenues would decline substantially: the Tax Policy Center study of Gingrich’s planestimates by $1.3 trillion over a decade.  While the lower two quintiles would get an average tax cut of about $440, the top 1% (starting at incomes of about $629,000) would get an average $344,000 cut and the top 0.1% (starting at incomes of about 2.868 million) an average $1.9 million cut.  Id.

See also Study: Gingrich Plan would provide big breaks for rich, blow huge hole in budget deficit, Washington Post (December 12, 2011); Rubin et al, Gingrich Plan to Add $1.3 trillion to Deficit, Study Finds, Bloomberg (Dec. 12, 2011).

Gingrich’s rationale is one that the right-wing American Enterprise Institute strongly supports–the tired old reaganomics rationale that eliminating taxes on capital will create new investments.  See, e.g., Why Romney is Wrong and Gingrich is Right on Capital Gains Taxes, AEI ( Dec. 12, 2011).  This theory is hogwash–lowering the return on investment by the piddling tax (whether 15% or 20%) will not keep folks from investing.  Folks will still make profits and they will still invest those profits, even if they have to pay taxes.  Paying no tax on dividends and capital gains won’t make the rich suddenly invest in entreprenuerial activities, my friends.  (Simply trading corporate stocks on the secondary market is not, by the way, entrepreneurial.)

The Gingrich website also objects that this plan is really good for everybody.

An optional flat tax reform will be simple: Tax returns can be done on one sheet of paper,” the website says. “Subtract from income a standard deduction and deductions for charity and home ownership, multiply the result by the fixed, single rate of taxation of at most 15 percent, and the process is over.”  Wash. Post, above (quoting the website).

Folks, the hardest part of the income tax is figuring out whether you have income and how it is characterized (capital or ordinary).  Neither of those two difficulties disappears under Gingrich’s system.  Furthermore, ordinary fold really don’t have a very difficult time with their tax returns–they have wage income (withheld against), report the standard deduction and personal exemptions, and get a refund of part of the amount withheld.  The appeal to simplicity is a cover for the real purpose–to provide an unprecedented tax break to the wealthiest Americans at a time when the right is targeting Medicare and Social Security for cuts.  This is just one more example of class warfare from the right wing.

originally published at ataxingmatter

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The Numbers Behind Newt’s Plan to Balance the Budget

by Mike Kimel

The Numbers Behind Newt’s Plan to Balance the Budget

Newt Gingrich’s website provides information on The Gingrich Jobs and Prosperity Plan. It starts with this:

America only works when Americans are working. Newt has a pro-growth strategy similar to the proven policies used when he was Speaker to balance the budget, pay down the debt, and create jobs.

Excellent. That statement should be enough to get an idea of what the program will look like. I want to focus on the first piece: balancing the budget. (You can’t pay down the debt unless you run a surplus, so balancing the budget also deals with that issue.)

Here’s what the surplus / GDP looks like for the years from 1988 to 2004. The gray bar covers the years from 1995 (the Republican Revolution took office, and Newt Gingrich became speaker in 1995) to 1998 (Gingrich resigned as speaker in November 1998.)

(Incidentally – the surplus is simply Total Federal Receipts less Total Federal Expenditures, which come from lines 37 and 40 of the BEA’s National Income and Product Accounts Table 3.2. GDP comes also comes from the BEA.)

Figure 1

As you can see, the deficit did indeed turn into a surplus when Gingrich was in office. However, the chart makes it clear the trend began before Newt took office and continued after Newt left office. In fact, it seems that the deficit started falling in 1993. The surplus, on the other hand, peaked in the year 2000, fell, and the budget returned to a deficit. So what defined the years from 1993-2000? Oh yeah, they were the years Clinton was President. So Newt is basically saying he would support the policies that produced success in the Clinton years.

That is wonderful… those were years of great prosperity. You have to go back to the JFK & LBJ years to find presidents who oversaw faster growth rates in real GDP. But let’s stay focused on the deficit and surplus issue. In fact, let’s deconstruct the number into its constituent parts. Figure 2 shows Total Federal Receipts / GDP and Total Federal Expenditures / GDP.

Figure 2.

As is evident from Figure 2, Total Federal Receipts / GDP hit a low point in 1992 and started to rise in 1993, eventually peaking in the year 2000 and then falling. Total Federal Expenditures / GDP hit a high point in 1992, then began falling in 1993, eventually hitting a local nadir in 2000 and then starting to rise again. The trend during the Newt Gingrich years looks like the rest of Clinton years… well, except for a slight slowing in the rate at which expenditures were dropping.

Now, you might be thinking that Newt’s comments about deficit reduction speak more to his views on expenditures than on taxes. After all, few Republicans talk about increasing the tax burden these days and it would take a lot of guts for Newt to break with his party on this one. But looking once more at the numbers its obvious Newt really does want Americans to pay more.

Consider… in 1995, Gingrich’s first year as speaker, federal expenditures were 22% of GDP.In 1998, they were 20% of GDP. But… revenues in 1995 were 19.2% of GDP. That is to say, had revenues remained at the 1995 level, they would have been less than expenditures and the budget would have still been deficit Newt’s last year in office (and in fact, in 1999 as well). But Newt takes credit for balancing the budget.

Thus… by necessity he is taking credit for raising the tax burden on the American people. Granted, there were no hikes in the marginal rate while he was speaker, but the increase in the tax burden came about with increased enforcement and regulation. This is a man with political courage! This is a man who puts doing the right thing above any thoughts of personal gain!

Now, I’d like to put the tax hikes that Newt seems to be advocating in context. For this, I’m going to steal a graph from Presimetrics, the book I coauthored with Michael Kanell. In it, we used a slightly different version of the tax burden: instead of Federal Revenues / GDP, we looked at the percentage of people’s income that went to taxes. We looked at the annualized rate of change of this version of the tax burden for each Congressional administration from 1952 to 2008.

Here’s what we found:

Figure 3.

As Figure 3 shows, the Republican Revolution (which granted, extended a few years beyond Newt) oversaw the largest (by far!!!) annualized increase in the tax burden of any Congress in several decades! Because taxes aren’t that popular with Republicans these days, Newt is downplaying the issue, but he seems to be dogwhistling it for those of with some familiarity with the numbers. The only alternatives are that he is ignorant of the numbers, or that he is will to obfuscate the facts, but hopefully we can expect more than that from someone running for the highest office in the land.

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