A lot of the debate over the “fiscal cliff” has focused on the income threshold for tax increases. Obama campaigned on raising taxes on those making over $250,000, Speaker John Boehner came back by saying the cut off should be raised to $1 million or above, and then Obama said he’d go as high as $400,000. This was seen as a compromise on his part, but it shouldn’t be. The important point to keep in mind is that the income cutoff and dollar value of a tax increase are two different things.
Just as an example in the current fiscal cliff talks, the plan that Obama campaigned on was to raise taxes on those earning more than $250,000 per year. That would generate $824 billion in tax increases. But Obama’s most recent offer, billed as a “compromise” because he raises the threshold for tax increases to $400,000, actually raises taxes by $1.2 trillion (or $1.3 trillion, depending on whose math you believe) because it limits deductions. Even Boehner’s counter offer to Obama promised $1 trillion in tax hikes even though it raised the threshold to $1 million. (This should not be confused with his “Plan B,” which would have raised around $300 billion because it raised the income threshold without tweaking deductions.)
It’s important to keep in mind the dollar value of tax increases, not only because it tells us how much money is being sucked out of the economy, but because that will determine the Congressional Budget Office’s baseline for any broader tax reform that’s negotiated in the future.
