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Archive for the ‘individual’ Category
With the ink not yet dry on the compromise debt-ceiling legislation, some of the principlas are arguing about a key provision that would determine how likely it is that the new Joint Select Committee on Deficit Reduction would address the scheduled expiration of the current individual rate structure, estate tax, and the preferential rates on capital gains and dividends, i.e. the Bush tax cuts.
At issue is a provision bargained for by House and Senate Republicans and widely marketed to skeptical conservatives wary of the deal, prior to the vote. The provision aims to require the Joint Committee to use the benchmark of current law (rather than current policy) to score the legislation the Committee is required to vote on prior to November 23.
Under Section 301 of the debt-ceiling bill, deep, across-the-board, spending cuts go into effect, beginning in FY 2013, if Congress does not pass into law a proposal that would reduce the deficit by at least $1.2 trillion. The question is how that $1.2 trillion is measured – - against what benchmark.
Recognizing that it would far too tempting for the Joint Committee to reach the $1.2 trillion figure by measuring from a current policy baseline that assumes low taxes into the future, Republican negotiators insisted that the Congressional Budget Office should be required to use current law in providing estimates for Joint Committee deliberations. They specifically included a reference to Section 301(a) of the 1974 Budget Act in the debt-ceiling bill.
Now, White House economist Gene Sperling argues on the White House blog that the bargained-for language is not specific enough. Despite the intent of Republican negotiators, Sperling claims that the Joint Committee can adopt any baseline it chooses by a majority vote. The legislation may require CBO to provide an estimate based on current law, but the sequestration would not necessarily be triggered under his interpretation, if the Committee reaches the $1.2 trillion figure by some other measure. Paul Ryan strongly disagrees.
Sperling’s interpretation is nonsensical and it would gut the deficit reducing purpose of the legislation, because there is no bipartisan consensus on any baseline other than current law. For example, the current policy baseline used by the Administration assumes that taxes will go up on everyone earning over the $200/$250k threshold while the bulk of the Bush tax cuts will be extended. If the Joint Committee were to use the Adminsitration’s baseline, ironically, the Joint Committee would not be allowed to count the President’s preferred rate increases towards the $1.2 trillion.
Would the Adminstration argue against the Joint Committee using its own policy baseline? and what basis does it have for supporting any other benchmark? If there is no rationale for the baseline, then the whole Joint Committee exercise becomes nothing but smoke and mirrors.
The Wall Street Journal’s William McGurn discusses the recent dialogue between former Clinton official and tax expert William Galston and Reihan Salam, an advisor for the “pro market” think tank Economics 21 on the viability of President Obama’s famous pledge not to raise income taxes on families earning less than $250k in gross income.
Here are the articles McGurn cites:
In an appearance on PBS, Moody’s Chief Economist Mark Zandi and Stanford Professor John Taylor disagree on just about everything, except that allowing the top income tax brackets to rise to 36% and 39.6%, respectively, in 2011 would be bad economic policy given the fragile state of the economy. Both agree that getting the economy moving is the best way to squelch concerns about deficits.
The future of The American Jobs and Closing Tax Loopholes Act of 2010 (H.R 4213- a/k/a the “tax extenders bill”) remains highly uncertain. Even so, an examination of the arguments for and against the bill’s provisions is a valuable exercise. Many of these conflicting arguments are reflected in the wider debate over how to promote economic recovery while also assuring no recurrence of the world-wide financial crisis.
Questions such as: Which monetary policies and investment structures to use? How they should be put into place, and what specific goals should be achieved? animate the debate. Nevertheless, there is near universal agreement on the objective of re-establishing economic strength and stability while not rewarding the parties viewed as responsible (in whole or in part) for causing the economic collapse. These contrasting positions exist in a microcosm in the debate over the The Build America Bonds program.
Some argue in favour of continuing and expanding a program that has successfully created government and government contracting jobs at a low cost and in a reasonable time-frame. The Obama Administration cites a rise in state and local infrastructure development and job creation as being the direct results of the access to low cost financing that the bonds make possible for these governments http://www.whitehouse.gov/omb/budget/.
Because these benefits are being delivered via a direct subsidy and not through a third party, others contend that 1) the cost savings to issuers is greater than the cost of the program to the federal government http://www.treas.gov/offices/economic-policy/4%202%2010%20BABs%20Savings%20Report%20FINAL.pdf and 2) tax compliance is higher for those benefiting from the subsidies: http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf
An additional claim is that the program’s expansion of the taxable bond market serves to lower the pressure on the traditional municipal bond market and, thus, lowers interest costs for issuers of those securities http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf
Opponents argue that the Build America Bonds Program, while portrayed as tax relief, is, in reality, a tremendous government spending program that imposes upon taxpayers nationwide the costs of excessive underwriting fees paid to the original instigators of the economic distress: Wall Street banks. In addition, they argue that the subsidy provided to state and local governments is unnecessarily generous, and that it encourages excessive borrowing that could further impair state finances. Excessive borrowing by another major player in the U.S. economy, homeowners, played a major role in fueling the current crisis.
As the tax-writing committees struggle to develop tax policies that will create jobs in the near-term future while avoiding the mistakes of the recent past, debates like this one are likely to continue.
During the 2008 campaign, the President and his allies went to great lengths to prove that Joe Wurzelbacher a/k/a Joe the Plumber, would not see an increase in his taxes, primarily because Joe didn’t earn more than $200,000.
That was then.
The President says it’s a matter of fairness, and that the Joe’s of the world have been manipulating the tax code to taking advantage of a “loophole,” but now it seems highly likely that under a tax proposal the President has personally “air dropped” into fast moving tax legislation, Joe and millions like him would experience substantially higher federal taxes.
Under Section 413 of the House amendment to the so-called tax extended bill (H.R. 4213), the roughly 6 million service-oriented small businesses organized as S Corporations, limited liability companies, and limited partnerships would face substantially higher payroll tax liabilities.
Under present law, these businesses are required to pay their owner-employees no more and no less than the value of their services. This “reasonable compensation” paid to owners is deducted from the business’s gross income. Owner-employees are required to pay Social Security and Medicare Tax on this portion of their income, and (as owners) they incur both the employee and employer side of the tax: 15.2% up to the Social Security wage base of $106,800 and 2.9% beyond that.
Very often, after the business has deducted all it’s expenses, including salaries paid to owners, from gross income, there is money left over. (After all, businesses are formed to make a profit.)
The amount that’s left over is divided up and distributed (on paper) to owners who report it as income on their federal tax returns. Often these amounts are not paid out to owners, in fact. They are re-invested in the business.
Under present law, this additional business income is not subject to payroll tax, because it doesn’t represent a payment for services. Payroll taxes only apply to compensation, and, as a matter of fact, the IRS has fought countless court battles to make sure that business-owners don’t count too much income as salary. That way, business owners who don’t provide much in the way of services can’t cheat their way into higher Social Security benefits.
Now, the President says small business owners are cheating the other way. They are under-reporting what their businesses should be paying them in salary in order to reduce their payroll tax liabilities, and there is some justification to the claim. During the 2008 campaign, it came to light that John Edwards’ law practice arguably was paying him less than the value of his services. He was the primary rain-maker of the business.
Nevertheless, the President’s solution is a Procrustean one. Rather than require the IRS to sort the sheep from the goats and wolves, his bill would require millions of owner-employees to treat all (or nearly all) of their income from the business as compensation subject to employment tax. He would treat everyone the same way, and, implicitly, he is arguing that all service providers who own this type of small business are cheating on their taxes: a questionable assumption.
The President’s solution will also wreak havoc with the already stressed finances of American small business, and for a journeyman plumber like Joe, it would be an even bigger hit to his bottom line. That’s because owner-employees who legitimately earn less than the Social Security threshold will be hit with a whopping 15.2 percentage point increase in tax.
If their former top marginal rate was 25%, for example, they would experience a 61% rise in their marginal federal tax rate. And, as we all know, it is the marginal rate that impacts the millions of decisions occuring every day to work a few more hours or sit at home and watch re-runs on cable.
This can’t be good for the economy.
Postscript: the language of Section 413 of the bill and the recently published Joint Committee on Taxation description is unclear on the applicability of the new rules to trade professions. They are not specifically carved out, but they also are not specifically listed. Arguably, trade professional firms such as plumbers, electricians, and heating and air conditioning firms could be covered under the broad catetories: “consultants” or “engineers,” but the final determination will be left up to Treasury when it writes regulations implementing the new law.