This blog is on hiatus until Congress gets back to work on tax policy.
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:
Harvard Economics Professor Martin Feldstein says he is studying a proposal to cap the amount of tax savings individual taxpayers can claim from “tax expenditures” to 2% of adjusted gross income.
Under the cap, taxpayers would calculate their taxes as usual, claiming deductions for state and local taxes, the mortgage interest deduction, property taxes, and other itemized deductions.
However, these deductions would be disallowed to the extent that they reduce tax liability by more than 2% of Adjusted Gross Income. Employer provided health insurance evidently would be added to AGI and treated as a deduction, subject to the cap as well.
Using a National Bureau of Economic Research (NBER) model and a file of 15ok 2006 tax returns, Prof. Feldstein predicts that the cap would raise $278b in 2011 alone, and more in subsequent years. A 3% cap would raise $208b, and a 5% cap would raise $110b in 2011.
In an example, Prof. Feldstein illustrates that a taxpayer (perhaps a joint filing couple) earning $150,000 with a $30,000 of itemized deductions and $10,000 of employer provided health insurance would see a federal tax increase of $4,600, due to the cap.
One of the novelties of the proposal is that employer-provided health insurance would be taxed just as if it were salary income. It would appear on a “modified version of the current tax form.”
Prof. Feldstein was Chairman of the President’s Council of Economic Advisors from 1982-84. He says he is working on the cap proposal with Maya MacGuineas of the New America Foundation and Daniel Feenberg of the NBER.
There are already a number of limits on itemized deductions that will either spring back to life (PEP and Pease) or will affect tens of millions of additional taxpayers in 2013 (AMT).
Prof. Feldstein argues that his proposal would “simplify” the code by “inducing” 35 million taxpayers to use the standard deduction, but, if anything like this moves forward in Congress, middle income taxpayers with high health insurance premiums, high mortgage costs, or high state taxes will wonder why Congress is considering yet another law to dilute the value of expected tax benefits.
Prof. Feldstein doesn’t say specifically how charitable deductions would be treated, but, under his scheme, they would be limited by the cap as well.
- Martin S. Feldstein, Raise Taxes, but Not Tax Rates – - NY Times
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.