Johnny Depp and the New Tax Law

When the President signs the big tax deal later today, will he be cutting income taxes for most families or sparing them a tax hike? Will he be slashing the estate tax or resurrecting it?

Those questions have a clear answer in the official budget world: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 cuts both income taxes and estate taxes. Period. Why? Because current law is the official yardstick. And that law says that the 2001 and 2003 income and estate tax cuts will expire when the ball hits bottom in Times Square.

But existing law is not the only reasonable benchmark. Another way to look at things is to ask how taxes will change from 2010 to 2011. Viewed that way, extending the 2001 and 2003 cuts is not a tax cut; it’s a way to prevent a tax hike. And the estate tax deal is actually a tax increase: there was no estate tax in 2010, but there will be one—though small by historical standards—in 2011. In addition, as noted by my Tax Policy Center colleague Bob Williams, many low-income families will see their taxes go up because the gains from 2011’s payroll tax holiday will be more than offset by the expiration of 2010’s Making Work Pay tax credit.

Depending on your perspective, then, today’s tax deal is anything from a tax increase to a major tax cut. It all depends what baseline you use for measuring.

Which brings us to Johnny Depp. Depp plays the title character in the new film “The Tourist”. He doesn’t know anything about budget baselines, but he does learn how perceptions depend on what your benchmark is:

Inspector: Now, you wish to report a murder?
Depp: No, some people tried to kill me.
Inspector: I was told you were reporting a murder.
Depp: Attempted murder.
Inspector: Ah, that is not so serious.
Depp: No, not when you downgrade it from murder. When you upgrade it from room service, it’s quite serious.

Should today’s tax deal be compared to room service or to murder? I leave it up to you, dear reader, to decide.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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