Posted: Sep 14, 2010 9:15 am Post subject: Should they expire?
I'm sure many of you have heard about the talks right now about the "Bush Tax Cuts". What are your thoughts? Should they keep them or let them expire? Why?
Quote:
A guide to the fight over the 'Bush tax cuts'
By WILLIAM GALE and BENJAMIN HARRIS
The already heated fight over the so-called Bush tax cuts, which are set to expire at the end of this year, ratcheted up another notch on Monday. The White House and a host of influential Congress members staked out competing positions on the issue that is likely to dominate the debate over the economy from now until the November midterm elections.
The standoff amounts to a game of political chicken, but it also raises questions about what is best for pulling the country out of the recession, chipping away at unemployment and paying down the deficit.
In comments at a backyard town hall in a Northern Virginia suburb, President Obama delivered another pointed defense of his plan to extend the cuts for middle class and working families, while letting others — specifically the cuts for high-income earners — come to an end.
"We could get [tax cuts] done this week, but we're still in this wrestling match with John Boehner and Mitch McConnell about the last 2 to 3 percent" of upper-income taxpayers, Obama said.
Up on Capitol Hill, a spokesman for McConnell, the Senate GOP leader, said that every Senate Republican has pledged to oppose Obama's plan.
"Only in Washington could someone propose a tax hike as an antidote to a recession," McConnell, R-Ky., said.
Neither man, however, has the full support of his party, as politicians on both sides of the aisle worry about how the issue will play out with recession-weary voters.
McConnell’s comments came one day after House Minority Leader Boehner (R-Ohio) said he would support renewing tax cuts for the middle class but not the wealthy if that was his only choice.
Meanwhile, Politico reported Monday that some Democrats are now pressuring Speaker Nancy Pelosi to extend the cuts for all brackets, another indication that the debate is causing a rift between the party’s vulnerable moderates and safe liberals. And the Associate Press reported that Senate Democrats such as Kent Conrad of North Dakota, Evan Bayh of Indiana and Ben Nelson of Nebraska are siding with Republicans against raising taxes on anyone during a fragile economic recovery.
Just what are the cuts being debated? Here’s a brief guide to the issue.
What are the Bush tax cuts?
The cuts in question are tax changes that were enacted during the Bush administration that dramatically cut income and estate tax rates and revenues. The key bills were passed in 2001 and 2003.
The 2001 tax package was especially sweeping. Its two most prominent changes were a cut in individual income tax rates and a phase-out -- and one-year repeal -- of the estate tax. The top rate for taxpayers in the highest bracket dropped from 39.6% to 35%, while the rate for the next bracket down fell from 36% to 33%.
The 2003 tax cut reduced the income tax rates applied to long-term capital gains and dividends. Prior to 2003, long-term capital gains were taxed at 20 percent, and dividends were taxed at regular income tax rates. The 2003 legislation dropped the rate on most long-term capital gains and dividends to 15 percent.
Why is this happening now?
If Congress doesn’t extend the cuts, most households will see their taxes go up in 2011. Rates will automatically snap back to those in effect before the cuts were passed.
The reason: Congressional budget rules make permanent tax cuts that are not paid for by spending reductions or other tax increases difficult to pass. Because of these rules, the Bush administration and Congress were forced to pass "temporary" tax cuts and schedule them to expire at the end of 2010.
The timing of the tax cuts’ expiration creates a challenge for Congress and the Obama administration. Policymakers must weigh the potential short-term consequence of derailing a fragile economic recovery against the pitfalls of extending costly tax cuts that contribute to increasing budget deficits. And two months before an election, no politician relishes telling voters that taxes must go up.
What are the alternatives?
Alternatives to a full extension of the tax cuts have received substantial attention. President Obama has called for extension of the cuts on income below certain thresholds: $200,000 for single taxpayers and $250,000 for married taxpayers but ending them for higher income levels.
Former Obama administration budget director Peter Orszag recently endorsed extending the Bush tax cuts for both middle-income taxpayers and the wealthy for two years, if that's what's necessary to get a deal in Congress. But he argued they should then be phased out for everyone once the economy improves. Orszag’s reasoning was that temporary extension of the tax cuts would keep the economy humming during the recovery, but that a more permanent extension of the tax cuts — even if limited to middle-income households — was simply unaffordable because of the impact on the deficit.
This concern has been echoed by other prominent economists. Martin Feldstein, a senior adviser to the Reagan administration, also supports allowing the tax cuts to expire after a two-year extension. Alan Greenspan, former chairman of the Federal Reserve, called an extension of the Bush tax cuts without corresponding spending reductions “disastrous.”
This perspective differs sharply from that of some congressional leaders, such as Boehner and McConnell, who support the permanent extension of the tax cuts. Boehner, however, appears to have stated that he would support the president's plan over the alternative of not extending the tax cuts at all, though the interpretation of what he meant is still up in the air.
Can we afford to keep the tax cuts in place? What would each cost?
The 2001 and 2003 tax cuts are quite expensive in terms of lost revenue. Extending the lower tax rates on income would cost about $1.6 trillion over 10 years. A host of other measures that were part of the legislation — a higher exemption for married couples, the extension of the estate tax cuts at the 2009 level, the lower rates on capital gains and dividends, and a higher Child Tax Credit — would result in a revenue loss of about $300 billion each over the next decade.
Combined, extending the Bush tax cuts would cost about $3 trillion over 10 years; limiting the tax cuts to middle-income households would lower this cost by about $700 billion. Either way, that total would be added to the deficit.
Since the federal government is projected to run budget deficits throughout the remainder of the decade, extending these cuts means borrowing more to pay for existing government services. Some economists already are concerned that the debt level is so high that it could lead to a catastrophic outcome.
But isn’t it bad to raise taxes in a recession?
If stimulating the economy is the goal, there are more effective ways of doing so. Extending all of the Bush tax cuts would have a small bang for the buck in terms of stimulus, the equivalent of a 10- to 40-cent increase in Gross Domestic Product for every dollar spent, according to the Congressional Budget Office. Why? As the CBO notes, most Bush-tax-cut dollars go to higher-income households, and these top earners don't spend as much of their income as lower earners.
The CBO recently examined 11 potential stimulus policies; of those, extending all of the Bush tax cuts tied for the lowest bang for the buck. Letting the high-income tax cuts expire and using the money for aid to the states, extending unemployment insurance benefits, and tax credits that aid job creation all scored higher. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.
Will raising the top tax rates hurt small business?
One of the most common objections to letting the cuts expire for those in the highest tax brackets is that it would hurt small businesses. Sen. Orrin Hatch (R-Utah) recently said that allowing the cuts to lapse would amount to "a job-killing tax hike on small business during tough economic times."
This claim is debatable. Less than 3 percent of tax returns reporting small-business income are filed by taxpayers who fit Obama’s definition of a “high-income” taxpayer.
According to the nonpartisan Tax Policy Center, small-business income makes up a majority of the income for about 40 percent of households in the top bracket and a third of households in the second-highest bracket. Based on this analysis, if the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go.
Moreover, much small-business income is taxed at low or zero rates right now. Small business also fully deduct wage payments, so a higher tax rate should not impact their choice of hiring people.
What’s going to happen?
The next few weeks will be marked by political maneuvering, as members of Congress and the administration keep one eye on the upcoming elections and the other eye on the economy. Gridlock is one possible outcome, with a decision not coming until a post-election session. Neither side wants to be seen as adding to the deficit, nor do they want to be blamed for everybody’s taxes going up — especially the taxes paid by the middle class.
William Gale is a senior fellow and expert on tax policy and fiscal issues at the Brookings Institution, and Benjamin Harris is a senior research associate in economic studies at Brookings.
Moreover, much small-business income is taxed at low or zero rates right now. Small business also fully deduct wage payments, so a higher tax rate should not impact their choice of hiring people.
What?
Fully deduct wage payments.
By this logic all business expenses are "fully deducted"
Seriously stupid. _________________ Is President Obama a Keynesian?
Moreover, much small-business income is taxed at low or zero rates right now. Small business also fully deduct wage payments, so a higher tax rate should not impact their choice of hiring people.
What?
Fully deduct wage payments.
By this logic all business expenses are "fully deducted"
Seriously stupid.
I skipped the article and went to your comment before reading the article and after reading what you quoted, I won't bother to read the article as the author has already been completely discredited.
I don't have a clue as to why this is such a problem.
The congress during Bush2 tenure passed these cuts via reconciliation. You know, that evil "ram-it-thru" method.
So, if the D's want to extend only parts of the legislation, they should be able to do so using the same method.
My take on the subject itself - tax breaks for the wealthy are not stimulative according to most (respected) economists. They typically get saved rather than spent - quite possibly never impacting the economy directly. Furthermore - most truly wealthy people are not earning the bulk of their income from salary - they do so via investments and are taxed at capital gains rates - usually the 15% rate which is significantly lower than the bracket for high income earners. Heck, it's lower than the bracket for most of us average schmoes. As is stands currently, tax brackets are at a historic low level. Far lower than in the Reagan years for example.
So, my opinion in sum - if they are going to extend any of the cuts, keep them limited to only the most stimulative areas. The CBO can do this study. _________________
My take on the subject itself - tax breaks for the wealthy are not stimulative according to most (respected) economists. They typically get saved rather than spent - quite possibly never impacting the economy directly. Furthermore - most truly wealthy people are not earning the bulk of their income from salary - they do so via investments and are taxed at capital gains rates - usually the 15% rate which is significantly lower than the bracket for high income earners. Heck, it's lower than the bracket for most of us average schmoes. As is stands currently, tax brackets are at a historic low level. Far lower than in the Reagan years for example.
We pretty much always agree but this part is an oxy-moron because saved money is invested. The bank doesn't just hoard it.
Oh yeah and "I told Potsie I would do it" _________________ Steal My Book
My take on the subject itself - tax breaks for the wealthy are not stimulative according to most (respected) economists.
Which economics are these? Taxes are always associated with dead-weight loss which hurts everyone. Are these the same brilliant keynesian economists who think the government can spend it's way out of a recession?
Ask yourself this, who's policies were better at pulling out of a recession, Reagan or Carter? That's the difference between tax and spend, and tax cuts.
I don't have a problem letting these tax cuts expire at some point, but now would be the worst time to do it. This doesn't flow with the "little people"movement that the democrats have going for them but they are on the wrong side of history with their economics. _________________ You have just entered the twilight zone.
jryoung, every president spends, but as far as economic policy goes, "Reaganomics" is characterized by reduced government spending, and reduced taxes, among other things. _________________ You have just entered the twilight zone.
jryoung, every president spends, but as far as economic policy goes, "Reaganomics" is characterized by reduced government spending, and reduced taxes, among other things.
One of those other things is higher government debt brought on by reduced revenue, no?
I say extend them for 2 years then revisit. However, I think the inheritance tax should go up to at least the capital gains rate if not personal income.
No matter what, the wealthy will continue to find ways to avoid taxes and the gov't will continue to spend money it doesn't have.
I knew you would throw that out. To which I would counter - are they (not the banks) really "saving" it in a traditional sense (in the bank). If they are using those "savings" reinvest in the US economy via their local bank of through some other conduit then yar I'd agree a bit - but in the end the most stimulative way to put money back in to the economy is to spend it directly on goods & services.
This is why I say let's find the most stimulative way (according to CBO) and rock that out. Enough with the bitching and moaning. Just show me which way makes the most sense given the data we have available and do it. If that means all get extended ok. If that means 250k, 1m, 5m, whatever get raised, so be it.
Brad, I'm not going to get into a pissing match over Keynes or Krugman with you. I get it, you don't like what they have to say. IF you like, you can read THIS ARTICLE from Moody's printed yesterday on Bloomberg about it. _________________
One of those other things is higher government debt brought on by reduced revenue, no?
Nope, check the revenue numbers in the late 80s and 90s as a result of the boom created by Reaganomics. Although, tax cuts need to be accompanied by reduced spending as the returns from tax cuts will eventually level out. However, we'd be a lot better off keeping these cuts and not passing the spending bills coming down the pike. _________________ You have just entered the twilight zone.
I say extend them for 2 years then revisit. However, I think the inheritance tax should go up to at least the capital gains rate if not personal income.
No matter what, the wealthy will continue to find ways to avoid taxes and the gov't will continue to spend money it doesn't have.
I don't agree on the inheritance tax. That to me is a double-dip tax. The person who died typically earned that money and paid their fair share of taxes in the process. I don't see any reason why the inheritor should pay another tax on it.
Now, I can see cap gains (cost basis reset at DoD) and such, but not a "you inherited $XXX" so you owe 20% of it to Uncle Sam tax. _________________
Nope, check the revenue numbers in the late 80s and 90s as a result of the boom created by Reaganomics. Although, tax cuts need to be accompanied by reduced spending as the returns from tax cuts will eventually level out. However, we'd be a lot better off keeping these cuts and not passing the spending bills coming down the pike.
Government revenue did go down initially following tax cuts, in both 1983 and 2002. However, those were during times of recession so it's probably not fair to place that all on tax cuts.
chavez, convenient that Obama doesn't appear on that list. I honestly couldn't care less which party implements economics that work. I don't think Reagan had it perfect, but it was a lot better than what Carter and Obama are doing. I can't defend Bush's spending. A lot of the spending during Republican years comes from beefing up our military, which I think is worthwhile, but was taken overboard.
The bottom line is the market will correct itself better than the government can. In the basic supply and demand curve, taxes always result in dead-weight loss. The market functions more efficiently without taxes so if you're trying to spur the economy, you reduce taxes, not increase spending. Obama has this 100% backward. His policies aren't working just like they didn't work under Carter. _________________ You have just entered the twilight zone.
I say extend them for 2 years then revisit. However, I think the inheritance tax should go up to at least the capital gains rate if not personal income.
No matter what, the wealthy will continue to find ways to avoid taxes and the gov't will continue to spend money it doesn't have.
I don't agree on the inheritance tax. That to me is a double-dip tax. The person who died typically earned that money and paid their fair share of taxes in the process. I don't see any reason why the inheritor should pay another tax on it.
Now, I can see cap gains (cost basis reset at DoD) and such, but not a "you inherited $XXX" so you owe 20% of it to Uncle Sam tax.
I agree that it's a double-dip tax, but it's "free" property to the people who inherit. The people who earned the money aren't affected by their ancestors getting taxed. It's not so much that I want to see it go to Uncle Sam, I just see money being passed down from generation to generation to generation the same as being on welfare. I think we need something to keep J.D. Rockefeller's great^10 grandkids from being spoiled brats.
Interesting comments so far. I probably could have just started the thread without the article, as it wasn't really the greatest anyhow.
My take right now is to leave them in place and revisit in a couple years, like ohsix said. I'm not sure that we will see growth because if it, but I'm worried we'll see a deeper recession. I'd like to see the cuts for the lower class and middle class stay in permanently, like the lower tax brackets across the board. I think the highest bracket along with capital gains is arguable. _________________ If love is blind, why is lingerie so popular?
microman, Reagan is a real piece of work. The fact that he IS deified is sickening. Of course, in my experience those who deify him are largely near-retiree angry white people. Not really a big surprise. They (media) actually gave a mouthpiece to a guy who wanted to rename local Mt. Diablo to Mt. Reagan. The response to him from CA state parks... uhmm no don't think so. _________________
ohsix, I thought about that when I was responding. That problem might be better cleaned up by raising the threshold significantly, so that only the very top percentile is affected by it.
The guy passing 2-5m down isn't typically Rockefeller-ish. Typically it's the person who made excellent choices during their life resulting in their "wealth". That is who I'd like to see shielded from the double-dip.
Of course, if their kids are aholes, the money will get spent asap and some will return to gov't coffers via other forms of tax. We see too much of this here I'm afraid.... _________________
chavez, I have no problem with the 1st 2-5mm being tax free. Even the 1st 2-5mm per kid. At some point, I think it needs to go back to contribute to society.
Maybe I just have vendetta against "old money" trust fund kids looking down on the people who have made their own wealth.
They are no longer the "Bush" tax cuts. They have been in affect for over 8 years and have not been rescinded through many Congresses and 2 President's. They are the tax rate not some short term give back by the govt.
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I'm not going to get into a pissing match over Keynes or Krugman
I would love to take a piss on Krugman. I'd love to stuff in his mouth too but judging by what usually comes out of it when he talks, he eats enough already.
Keynes early work was great but he threw out some fundamentally flawed economics and politicians have used it as fodder to justify their spending for years. Through the last couple decades they have spent in good times when there was tax money to spend and they spend when there isn't any using Keynes as justification.
Bumper sticker I want to have made - "Are you better off now than you were 4 trillion dollars ago?" _________________ Steal My Book
microman, Reagan is a real piece of work. The fact that he IS deified is sickening.
What's your beef with Reagan? Or do you just not like the people who use him as an example?
I'm sure I would hate whatever example tax and spenders use to support their theory. But they don't have any good examples. The best one they have is WWII but there are so many more factors that come into play there it's really not worth mentioning. _________________ You have just entered the twilight zone.
chavez, 29 thousand dollars worth? That's 4 trillion divided by the 138 million taxpayers. Unless your refering to the upcoming birth....in that case it would be closer to 300 thousand dollars worth. _________________ Steal My Book
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