Congress returned to Washington, D.C. this week after its summer recess. The session will last four weeks, before the body adjourns for midterm electioneering. This short legislative session is likely to be dominated by issues concerning the economy, specifically tax policy. If you did not know, the tax cuts enacted in 2001 and 2003, collectively known as the Bush tax cuts, are set to expire at the end of this year (no change has been made, this was the way the two laws were written by the Republican-controlled 107th and 108th Congresses). The debate over whether to let the tax cuts expire or to extend them (temporarily or permanently) or to do something in between has grown more heated in the last few weeks and will probably culminate in the four weeks ahead.
During the 2008 campaign, and into his presidency, Obama had said that all of the Bush tax cuts should expire at the end of this year, as scheduled. But with the economy barely getting better, he has changed his position and now proposes extending the Bush tax cuts permanently for individuals earning* $200,000 or less and families earning $250,000 or less. He would allow them to expire, returning to the levels that existed under the Clinton Administration, for those earning more than the amounts listed above. The president and others argue that the “tax cuts for the rich” would do little to help the economy. For most of this year, congressional Republicans had advocated making all of the Bush tax cuts permanent; they have since called for extending them 1 or 2 years (some congressional Democrats are with them). Their main argument is that a tax increase would stifle the fledgling recovery, and more specifically that an increase targeting those making over $250,000 would hurt the engines of American job creation—small businesses. I find the latter argument disingenuous for two reasons. First, less than 2% of tax returns that report small business income are filed by taxpayers earning more than $200,000 a year. Second, if congressional Republicans were seriously concerned about the well-being of small businesses, they would not be blocking the bill in Congress that extends small business tax cuts and provides $30 billion for business loans. Aside from that, who’s right?
It turns out that there is some merit to both sides’ arguments. To President Obama’s point, according to the independent Congressional Budget Office and other authorities, extending all of the Bush tax cuts would increase GDP 10-40 cents for every dollar “spent” in tax cuts. This is because most Bush tax cut dollars go to higher-income households, and these earners generally spend less of their income than lower-income households. However, to congressional Republicans’ point, several economists agree that any increase in taxes for any group will slow or reverse our very modest recovery. Those economists include the Obama Administration’s outgoing director of the Office of Management and Budget, Peter Orszag.
So what will happen? My guess is that the small business tax package will be passed and that there will be a compromise on the Bush tax cuts. Tax rates for those households earning $250,000 or less ($200,000 or less for individuals) will be made permanent (i.e., no expiration date) and the tax rates for those earning above those amounts will be extended for 2 years. Of course, I could be wrong; either of the proposed options, or one not yet espoused could be adopted. Or Congress could wait until next year and start a new tax plan from scratch. Remember, Congress can set or adjust tax policy whenever they choose by appropriate legislation and it can easily be back-dated. What are your thoughts? Join the Discourse!
*All tax rates are based on taxable income. It’s the income that is left after you subtract all of your deductions (personal exemptions and standard or itemized deductions)
**Edited 9/20/10 based on comment below