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FACT CHECK: Looming tax hike not the biggest ever

Monday - 6/11/2012, 4:03pm  ET

By STEPHEN OHLEMACHER
Associated Press

WASHINGTON (AP) - Republicans are calling it "Taxmageddon," the big tax increase awaiting nearly every American family at the end of the year, when a long list of tax cuts is scheduled to expire unless Congress acts.

It would be, GOP leaders in Congress say again and again, "the largest tax increase in American history."

Except it wouldn't be, not when you take into account population growth, rising wages, and most importantly, the size of the U.S. economy. When those factors are taken into account, the largest tax increases were those imposed to help pay for World War II _ back when the U.S. raised additional revenue to pay for wars instead of simply borrowing.

Nevertheless, it is an exaggeration that has proved too tempting for top Republicans in Congress:

_ "Any sudden tax hike would hurt our economy, so this fall _ before the election _ the House of Representatives will vote to stop the largest tax increase in American history," House Speaker John Boehner, R-Ohio, said in a May 15 speech in Washington.

_ "Before we leave for August, I expect to schedule a vote on legislation preventing the largest tax increase in history," House Majority Leader Eric Cantor, R-Va., wrote in a recent memo to fellow House Republicans.

_ "Millions are unemployed and millions more are underemployed and the country is facing the largest tax hike in history at the end of the year," Senate Republican Leader Mitch McConnell said Thursday in a speech on the Senate floor.

_ "This would be, without any exaggeration, the largest tax increase in American history," said a May 17 letter from 41 Republican senators to Senate Majority Leader Harry Reid.

Republican presidential candidate Mitt Romney gives the claim a different twist, applying it to President Barack Obama's budget proposal for next year. That's an even bigger exaggeration.

THE FACTS: A huge collection of tax cuts is scheduled to expire at the end of the year, affecting families at every income level and businesses of many stripes. Many of the tax cuts were first enacted under former President George W. Bush and extended under Obama.

If Congress does nothing, income tax rates would go up, estate taxes and investment taxes would increase and the alternative minimum tax would hit millions of middle-income people. A temporary payroll tax cut that has been of benefit to nearly every wage earner in 2011 and 2012 would expire, costing the average family an additional $1,000 a year.

In addition, dozens of other tax breaks for businesses and individuals that are routinely renewed each year already expired at the end of 2011. Congress was expected to renew many of them by January, so taxpayers could still claim them on their 2012 tax returns.

If Congress fails to act, businesses would lose a popular tax credit for research and development as well as generous tax breaks for investing in new plants and equipment. Individuals would lose federal tax breaks for paying local sales taxes, buying energy efficient appliances and using mass transit.

In all, federal taxes would increase by about $423 billion next year, according to figures from the nonpartisan Congressional Budget Office and the Joint Committee on Taxation, the official scorekeepers for Congress.

Combined with federal spending cuts scheduled to take effect next year, the one-two punch would probably send the U.S. economy back into recession, according to a recent CBO study.

Still, the tax increases would pale in comparison to those imposed to help finance World War II.

Before the 1940s, the individual income tax applied to only a small percentage of the population. By the end of war, the income tax was levied on most working people, with a top tax rate of 94 percent on income above $200,000.

By comparison, the current top rate is 35 percent, on taxable income above $388,350. If Congress does nothing, the top rate would return to 39.6 percent next year _ the same rate that was in place for most of the 1990s.

In dollars, next year's tax hikes would be the biggest. But the population is more than twice as big as it was in the 1940s and the size of the U.S. economy is 80 times bigger. That's why economists usually measure taxes and government spending as a share of the economy.

The 1942 tax increase represented more than 5 percent of the U.S. economy, as measured by the gross domestic product, or GDP. The 1941 tax increase was 2.2 percent of GDP, according to a Treasury Department paper published in 2006.

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