Says the 'largest tax increase in American history is set to occur on January 1st unless President Obama and Congress can come to an agreement.
EDITOR'S NOTE: A reader emailed us to point out that we got one tax-cut option backwards in the next-to-last paragraph. Nobody's considering giving tax cuts only to the wealthy; rather, one option is to extend the tax cuts for everyone but the wealthy. The tax increase figure is given correctly, though: Letting the tax cuts expire for the wealthy would translate to a tax increase of about 0.4 percent of GDP. We've corrected the sentence below, and it does not affect our calculations.
U.S. Rep. Francisco 'Quico' Canseco opened a recent email blast by saying that an historic tax surge has his attention. 'As you may know,' the San Antonio Republican wrote constituents, 'the largest tax increase in American history is set to occur on January 1st unless President Obama and Congress can come to an agreement.' His email also says the Republican-majority House would vote later that week on preventing the increases. Canseco was hardly the first advocate to declare that the tax hike would be record-setting. When the tax cuts put in place under President George W. Bush were last up for renewal in 2010, 'largest ever' became a rallying cry of sorts for congressional Republicans and news entities alike. In a Fox News Sunday appearance that year, former vice presidential candidate Sarah Palin made a similar claim. At the time, PolitiFact ruled her claim 'Pants On Fire' because she was wrong about the ranking and incorrectly described the Democrats' plans. The tax-related figures haven't changed much since. Estimates vary as to how much taxes would rise if the Bush-era tax cuts were allowed to expire without exceptions. Congress approved the tax breaks in 2001 through the Economic Growth and Tax Relief Reconciliation Act, and adjusted them in 2003 through the Jobs and Growth Tax Relief Reconciliation Act. The tax cuts were set to expire in 2010, because they passed Congress through a procedure known as reconciliation, which only requires 50 votes in the Senate. But, after a heated debate, lawmakers voted in 2010 to extend them for two more years. Some tax analysts have argued that, because the tax cuts were intended to be temporary, their expiration does not count as a tax increase. We're not getting into that argument here. Most estimates for the increase caused by repealing the tax cuts hover around $3.7 trillion over 10 years, the number represented in the Congressional Budget Office's Budget and Economic outlook from January 2012. (The number is listed under the category of 'extend certain income tax and estate and gift tax,' though analysts assured PolitiFact New Hampshire that it refers to the Bush tax cuts). Another $900 billion increase would stem from keeping the Alternative Minimum Tax from socking more taxpayers. In raw dollars, then, the resulting $4.6 trillion total would rank among the greatest tax increases in history. By email, Canseco's spokeswoman, Kyler Arnold, pointed out by email that the CBO said in January 2012 that the impact of not extending the Bush-originated tax cuts would be about $5 trillion. Table 1-6 in the report indicates that the cumulative costs of extending the tax cuts and steadying the Alternative Minimum Tax through 2023 would be $5.3 trillion, counting nearly $800 billion in debt service. But there's a better way to compare the potential increase with tax increases through history. Economists do this by calculating tax increases as a percentage of the gross domestic product, or GDP. GDP means a country's entire annual economic economic output; it's a way of measuring the entire economy. If we calculate tax increases as a percentage of GDP, it means we don't have to worry about distortions from variables like inflation or economic growth. Spread over the next 10 years, the $4.6 trillion tax increase would amount to about 2.25 percent of the nation's GDP. That figure, calculated with help from several tax analysts, starts from adding together the Budget Office's projected GDP figures over the next 10 years, 2013-2022; then the total is divided by the $4.6 trillion figure. The result is higher than most tax increases in recent history, according to a 2006 U.S. Treasury report analyzing all tax measures since 1940. According to the report, the Bush tax cuts have held a higher percentage of the GDP than many of the biggest tax laws in recent history. It beats out the the Tax Equity and Fiscal Responsibility Act of 1982, which measured in at 1.23 percent of GDP by the time all its provisions went into effect in 1986. It also measures larger than the Revenue Act of 1941, which at $3.6 billion, amounted to 2.2 percent of GDP. Yet, according to the analysis, the Bush tax cuts fall well below the Revenue Act of 1942, which is estimated at 5.04 percent of GDP. That act passed into law after the United States entered World War II. And this would make the Bush tax cuts, should they expire, the second-largest tax increase in history, as a percentage of GDP. 'There is no doubt, if all the (Bush) tax cuts were allowed to expire, this would have a very big impact,' Howard Gleckman, an analyst at the Tax Policy Center, an independent tax analysis group, told PolitiFact New Hampshire. Gleckman, author of the blog TaxVox.org, continued: 'But, if you're asking the question, would it be the largest tax increase ever, the answer is no.' By email, Arnold pointed out the 1942 tax increase included a 5 percent 'Victory' income tax add-on that was repealed in 1944 'and never designed to be a permanent tax increase' while, she said, 'the tax increase set to occur at the end of the year is a permanent tax increase, absent legislative action. Comparing a tax bill (including a temporary tax increase for the war) to a permanent tax increase is not apples to apples.' We ran Arnold's thought by Gleckman, who pointed out that when they passed into law, the Bush tax cuts had a built-in end date -- one since extended by Congress. Broadly, he said, all tax laws are temporary in that sense, though Bush's cuts were explicitly temporary. Gleckman agreed that ending the Bush tax cuts would result in the biggest hike by the GDP gauge since 1942. However, he said, the difference between the No. 1 and speculated-about No. 2 tax increase, 2.25 percent of GDP versus 5 percent, is huge. 'This is like saying the horse that came in second by 20 lengths almost won,' he said by phone. Broadly, as Gleckman notes, few in Washington expect the Bush tax cuts to expire in full. Rather, the debate this year has centered on whether to extend the tax breaks for everyone or extend them for all but the nation's highest earners. If only cuts for the most wealthy residents were allowed to expire, it would mean a tax increase of about 0.4 percent of GDP. Our ruling The trillions of dollars at stake with the expiration of the Bush-era tax cuts places them among the nation's most costly. Still, the cuts, if allowed to expire, would amount to less than half the percentage of the gross domestic product reflected in the 1942 tax increase. We rate Canseco's claim as Half True.