Is Barack Obama a Tax Cutter or a Tax Hiker?

The men and women of the pro-Obama, political-media establishment are in a funk.  They and their smartest-President-ever were humiliated by the voters in the mid-term tsunami. They’ve begun to coalesce around an excuse to insulate them from the grim reality: The voters were stupid and misinformed.  Typical is Sara Seltzer’s column at AlterNet, “16 of the Dumbest Things Americans Believe and the Right Wing Lies Behind Them.”

According to Ms. Seltzer “right wing lies” are to blame not only for beliefs she doesn’t share but also for things some people just don’t know, like the names of Supreme Court Justices.

Let’s consider one of Ms. Seltzer’s “right wing lies,” the one that has become a post-election campaign slogan:

…many Americans genuinely believe Obama has raised their taxes — even though the reality is that our president actually lowered them for most of us.

First, what is the definition of a “tax cut?”  What does “lower taxes” mean?   The Bush tax cuts, enacted in 2001 and 2003, lowered tax rates for every income tax payer.  For example, the rate was cut from 15% to 10% for the first $8,350 of taxable income for a single person or $16,700 for a married couple.

But the Obama “tax cut” included in his stimulus bill was not a tax rate reduction.  Implemented in 2009 it was a one-time transfer from the government of $400 to singles or $800 to married couples.  Obama also calls the home buyer’s credit a “tax cut.”  This was a one-time transfer of $8,000 from the government to first time home buyers. During his Presidential campaign Obama proposed to start or expand eight different programs that would pay cash benefits to individuals.  He called all of them “tax cuts.”

So-called right wing lies are not to blame when people think of a tax cut as a continuous, on-going tax rate reduction, not a single, small payment from the government.  Most people didn’t realize the President deceptively calls that $400 they got 18 months ago a “tax cut” so, understandably, they didn’t give him credit for being a tax cutter.

On the other hand, as a perverse result of ObamaCare tax increases will eventually hit millions of people who are not among “the rich.”  During the health care debate the folks at the Congressional Budget Office (CBO) regaled us with their astounding conclusion that ObamaCare would reduce the deficit.  Buried in the CBO analysis was the inadvertent disclosure that part of the deficit reduction resulted from permanent tax increases:

…costs would be partly offset by…other budgetary effects, mostly on tax revenues, associated with the expansion of federally subsidized insurance…

What did this mean?

Under the current tax code employer provided health insurance passes to the employee tax free.  However cash wages and salaries are subject to taxes:

• payroll tax of 7.65% on the employer;
• payroll tax of 7.65% on the employee; and
• income tax on the employee at 10% – 35%, depending on employee’s tax bracket

Here’s the CBO footnote, explaining “other budgetary effects:”

Changes in the extent of employment-based health insurance affect federal revenues because most payments for that coverage are tax-preferred. If employers increase or decrease the amount of compensation they provide in the form of health insurance (relative to current-law projections), CBO and JCT assume that offsetting changes will occur in wages and other forms of compensation—which are generally taxable—to hold total compensation roughly the same.

Translation: The CBO predicted that lots of employers will stop providing health insurance.  CBO assumed those employers will increase cash wages by the amount they had been spending on health insurance.  Thus, CBO projected an increase in tax revenue from the payroll tax and income tax on those increased cash wages.  They also assumed that those employees will use their additional cash wages to buy health insurance from new government-operated exchanges.

The table below illustrates the perverse tax consequences of replacing employer provided health insurance with cash wages.  An employee with a $50,000 salary gets whacked with a 30% tax increase. The negative tax consequences are be even greater for employees in higher tax brackets.

Other tax increases in the Health Care bill are levied on insurance companies, employers and medical device manufacturers.  All these increases will eventually be passed on to patients.