SalemNews.com, Salem, MA

Nation/World

December 8, 2012

Higher rates or fewer tax breaks?

(Continued)

The clash is a key part of negotiations for a deal to avert big tax increases and spending cuts due to begin in January — the fiscal cliff — unless Obama and Congress reach an accord on some other way to rein in the government’s ballooning debt.

Obama wants to raise $1.6 trillion in revenue over the next 10 years, partly by letting decade-old tax cuts on the country’s highest earners expire at the end of the year.

He would continue those Bush-era tax cuts for everyone except individuals earning more than $200,000 and couples making above $250,000. The highest rates on top-paid Americans would rise from 33 percent and 35 percent today to 36 percent and 39.6 percent.

House Speaker John Boehner, R-Ohio, has offered $800 billion in new revenues to be raised by reducing or eliminating unspecified tax breaks on upper-income people.

There are more than 100 tax breaks with a cumulative price tag estimated at $1.1 trillion yearly. They range from huge breaks like the deduction for charitable contributions and the income exclusion for employer-provided health insurance to obscure tax incentives for capturing carbon dioxide emissions or maintaining railroad tracks.

The nonpartisan Congressional Budget Office said in a report last month that raising tax rates would dampen people’s incentive to work and reduce the nation’s labor supply. Raising the same amount of revenue by eliminating tax breaks would probably be less negative, but the impact would depend on which deductions were erased, the budget office said.

A separate study by the same agency and in the same month, however, suggested that the economic harm from letting tax rates rise for top earners would be relatively negligible.

That report estimated that extending the George W. Bush-era tax breaks for everyone would mean the economy would grow by 1.4 percent more than if all the tax cuts are allowed to expire. Extending the tax breaks for all but the top earners as Obama wants would produce economic growth of 1.3 percent, just 0.1 percent less. In a nearly $16 trillion economy, that one-tenth of 1 percent equals $16 billion.

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