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When is a $3.5 Trillion Tax Hike Not a Tax Hike?

2 min readBy: Scott Hodge

One of the least reported facts about the 11th hour debt limit deal between the White House and Congressional leaders is that it assumes that on January 1, 2013 virtually every working American will begin paying much higher taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es than they are today. Indeed, baked into the deal is a $3.5 trillion tax increase, yet plan supporters say it does not raise taxes. How can that be?

They can do so by assuming what is known as the “current law” baseline that assumes that all of the Bush-era tax laws expire as scheduled at the stroke of midnight on December 31st 2012. This means that all income tax rates will go up across the board, the child credit will fall from $1,000 to $500, the marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. will return. Moreover, the current law baseline also assumes that the AMT will not be “patched” and will affect tens of millions of unsuspecting taxpayers. Under this baseline scenario the federal government is estimated to collect $39 trillion in tax revenues over the next ten years. So by assuming taxes have already gone up lawmakers can say that they have not “technically” increased taxes.

Call it what you will, but Americans would still pay more in taxes than they would if all of the tax policies that are currently in place were simply extended for the next ten years. As the chart below shows, if all of the Bush-era tax laws were extended, along with the AMT patch, this “current policy” baseline would still be expected to raise roughly $35.5 trillion in revenues over the next ten years.

Thus, the budget deal’s current law baseline assumes $3.5 trillion more in tax revenues over ten years than what would otherwise be collected under current policies. That’s a 10 percent tax increase over current policies.

By contrast, federal spending is expected to total nearly $46 trillion over the next ten years. Under the most optimistic scenario, the compromise plan would “cut” $2.4 trillion in spending, which would amount to an overall spending cut of 5.2 percent. Of course, this assumes that none of the spending cuts are gimmicks – which considering the games they have already played with the revenue baseline, is a pretty big if.