1. Obama: “Four years ago, I told the American people I would cut taxes for middle class families. And I did.”
Reality: Obama has clearly broken his 2008 “firm pledge” not to sign “any form of tax increase” on families making less than $250,000. Of the twenty new or higher taxes in Obamacare, no fewer than seven of the taxes fall directly on middle class families, and many more will raise costs indirectly for these families.
Of recent note, Obama has altered his tax pledge: In a second term, he only promises not to raise income taxes on those making less than $250,000, and only for one year. After the one year has come and gone, all taxes are fair game, and at any income level.
2. Obama: “The fact that is that [Romney] only has to pay 14 percent on his taxes when a lot of you are paying much higher.”
Reality: The President is intentionally mixing apples and oranges, and more than once. What he is accurately describing is Mitt Romney’s average income tax rate—that is, his income tax liability as a percentage of his adjusted gross income. In 2011, he paid $1.9 million in federal income tax on $13.7 million of AGI, for an average income tax rate of 14 percent.
What President Obama would like middle class taxpayers to do is to compare Romney’s average rate with their own marginal rate. The marginal rate is the rate at which a household’s last dollar of taxable income is taxed. For middle class families, their marginal tax rate is 15, 25, or 28 percent, depending on income. These are all higher than Romney’s average rate, but that isn’t a fair comparison. It’s mixing apples (average rate) with oranges (marginal rate).
The President would also like middle class families to add in their total federal tax burden (which includes Social Security and Medicare payroll taxes) and compare this to Romney’s average income tax rate. Again, this is comparing apples (income tax burden) with oranges (total federal tax burden).
The fairest method is to compare middle class average income tax rates with Romney’s average income tax rate. After all, that latter data point is the one the President used, so it’s most fair to compare that number with middle class families. According to CBO, a family in the middle income quintile (those earning at least $34,000) had an average income tax rate of 3.3 percent. Those in the fourth quintile (earning at least $50,000) had an average income tax rate of 6.2 percent. Only when you get to the top quintile (those earning $75,000 and more) do the average rates cross Mitt Romney’s 14 percent line. In no way can the President credibly claim that a typical middle class family has a higher average income tax rate than Romney’s 14 percent average income tax rate.
Even when comparing total federal taxes, it doesn’t hold up. Romney’s income puts him in the top 1 percent of income earners. Their overall average federal tax rate (which includes payroll taxes as well as income taxes) is nearly 30 percent. Compare that to families earning $34,000 per year (14 percent), and $50,000 per year (17 percent).
As ATR has pointed out, the tax code is already steeply-progressive. It doesn’t help matters when the President of the United States is playing fast and loose with different data sets.
3. Obama: “[Four years ago] I told you I'd cut taxes for small businesses, and I have.”
Reality: The principal tax cut for small business that President Obama is bragging about is a small employer tax credit to purchase health insurance. The only problem is that this tax credit is so complicated to comply with, very few small employers are actually using it. The IRS and HHS practically have to beg employers to even take a look at it. According to CBO, their estimated score for this tax provision is half of what they originally thought it would be, or $20 billion over the next decade. Meanwhile, even this small amount is dwarfed by the rate hike small employers will face under the President’s plan.
In May, the Government Accountability Office released a report focusing on why so few businesses were using the credit:
“According to employer representatives, tax preparers, and insurance brokers that GAO met with, the credit was not large enough to incentivize employers to begin offering insurance. Complex rules on FTEs and average wages also limited use. In addition, tax preparer groups GAO met with generally said the time needed to calculate the credit deterred claims.”
Meanwhile, the President’s plan to raise the top two marginal income tax rates will not just affect high-income families. Because small businesses pay taxes using the individual rates, a hike in these rates is a hike in the small business tax rate. According to IRS data, a majority of small business profits face taxation in the top two brackets.
The Obama-Biden plan is a tax increase on one million successful small businesses. The plan will raise taxes on a majority of small business profits and hit those companies which employ a majority of Americans who work for small businesses. Americans for Tax Reform spells out the details here.
4. Obama: “Both Governor Romney and I agree actually that we should lower our corporate tax
Reality: Obama claims to be for corporate tax reform, but it isn’t even in his budget. His administration released a plan in the spring, but he hadn’t said a word about it until the first debate.
Even that plan would have been a net corporate income tax hike of hundreds of billions of dollars. With a federal rate of 28 percent, the U.S. would still have a higher corporate tax rate than major trading partners Canada, the United Kingdom, Germany, and Mexico. It would be higher than the OECD (developed nation) average of 25 percent. The federal rate reduction from today’s 35 percent is inadequate.
Furthermore, Obama has already signed into law tax hikes on corporate shareholders. Taxes on corporate owners (i.e. capital gains and dividend taxes) are additional bites at the apple of corporate profits.
The combination of the capital gains and dividends rate hikes in his budget and Obamacare’s 3.8 percent “investor surtax” have the effect of raising the integrated tax on corporate profits. The capital gains and dividends rate hike will hit middle class savings hard by lowering stock prices, impacting everyone’s 401(k) and IRA.
5. Obama: “What I've also said is for above $250,000, we can go back to the tax rates we had when Bill Clinton was president.”
Reality: Under the Obama-Biden plan, several tax rates for these households would be higher than during the Bill Clinton years. In particular, tax rates on investment income would be much higher than when Clinton left office: