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As I promised in last Friday’s TaxVox post, here is TPC’s estimate of the 2012 distribution of President Obama’s tax proposals in the 2009 budget, measured against the administration’s chosen baseline. That baseline looks a lot like current policy: extend the Bush tax cuts, index and make permanent the 2009 estate tax, and permanently patch the alternative minimum tax by indexing forward the 2009 parameters.
How does that shift the bottom line? Against the more expansive baseline, some people pay more tax, but they are way up the income scale.
By design, Obama’s proposals would yield virtually no tax change overall, but tax shifts would differ substantially across quintiles (top figure). The lowest 20 percent—or quintile—would see its after-tax income rise by just over 4 percent, the second quintile would get just over half as much, and the next two quintiles would reap after-tax income boosts of 1 percent or more. Only the top fifth would see its tax bill rise, pushing its post-tax income down 1.5 percent. That looks like a pretty progressive tax bill that would be roughly revenue neutral to boot—measured against a fiscally irresponsible baseline.
Break down the top quintile further and the progressivity continues further up the income scale (bottom figure). On average, tax units in the 80th through 95th percentiles would get small tax cuts. Only the top 5 percent would suffer a drop in after-tax income, and for the least well-heeled four-fifths of them, income would dip an average of just 0.7 percent.
Obama would reserve his largest hits for the big guys, clipping after-tax income by more than 5 percent for the top 1 percent. Candidate Obama promised not to raise taxes on the bottom 95 percent of households and his first budget makes good on that promise.
So what is it that makes this view of the president’s tax plan look so much more progressive than the one I showed last Friday? The answer is pretty simple: last week’s story combined the effects of the Bush and Obama tax plans. Bush cut taxes for everybody but heavily favored the rich. Obama first assumes that many of those regressive tax breaks will remain in place but then turns around and raises taxes on those at the very top of the income distribution. Combine the two and almost everyone gets a tax cut. If you accept the immortality of the regressive Bush tax cuts as a given, add Obama’s new refundable credits, and toss in higher tax rates for the highest-income taxpayers, you end up with a highly progressive mix.
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