Taxing Questions

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!

Notes**:

*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

This entry was posted in Finance, The Congress and tagged , , , . Bookmark the permalink.

3 Responses to Taxing Questions

  1. Ben says:

    I’m inclined to believe that an increase in taxes would be bad for our economy. You might be surprised to find that I think keeping all of the Bush tax cuts is not necessarily the best option. While I am alright with letting the cuts expire for those making over $200,000 ($250,000 married, which by the way, is weighted against married families), I am concerned about Congress continuing to play class warfare with the taxes. Why are most people alright with increasing taxes on the rich? Because they don’t fall into that category. As you mentioned, only 2% of returns filed last year topped the threshold. But I don’t think the answer is to continue to divide the country by saying, “gotta tax those rich people more”. Right now, we have spent ourselves into a hole. Congress has caused this problem and now we get to pay for it. When you have a deficit like this, if you don’t increase the revenue you are bringing in some, you’ll never get out of the hole. I prefer our longterm solution to be to cut spending rather than raising taxes. The question is, does Congress have the guts (or the integrity) to do that?

    P.S.~ I don’t want to be technical, but AGI is your income before you subtract personal exemptions, and standard or itemized deduction (the itemized deduction includes things like charitable contributions and mortgage interest). Just thought I’d pass that along.

    • This is why it’s good to have a friend who is a tax professional! I don’t mind you being technical at all, that’s what this is about; thanks for the info on AGI (one word–“all” really screwed me up. Bad generalization on my part). Over the last decade, the largest increases to federal outlays have come on the programs that the people want, so it is extremely difficult for leaders to cut them and stay around to protect those cuts. Also, federal spending has grown 71% this decade, compared to last decade (i.e. we’ve spent 71% more 2001-2010 than we did 1991-2000); for the past 100 years, the decade over decade spending change has been 198% on average. The problem is even though we’re not spending as much more, we still don’t have the money to cover it. I think we need to have a combination of some tax increases combined with spending cuts across the board. Maybe a short extension until the economy is back on its feet, while in the meantime, we cut spending and figure out a way to dramatically simplify our tax system for the long run.

      • Ben says:

        I agree with your suggestion of a delay in tax increases. I think it would be detrimental to our economy to raise taxes right now. And raising taxes usually doesn’t result in the benefit that all the politicians seem to think it will. Cuts definitely need to happen. I can think of several ideas of things that could be cut but they are too complicated to try and type out here. I like to see someone else discuss the idea of a simplification of the tax system. We should talk about that more sometime soon.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s