Posted by Pete Davis
I just gave the following speech to the National Economists Club at 12:30 p.m. in D.C.
For 10 years, Congress has known the Bush tax cuts would expire at the end of this year, but Congress still hasn't set next year's tax rates. Extending all of the
Bush tax cuts through 2020 would cost $3.2 trillion, not including indexing of the Alternative Minimum Tax. President Obama has proposed extending $2.2 trillion of those tax cuts for those with incomes under $250,000 ($200,000 for singles). That would continue the present law 10% bottom bracket, marriage penalty relief, and $1,000 refundable child credit, but it would raise the top marginal tax rate from 35% to 39.6%.
Mr. Obama would raise the top rate on capital gains and dividends from 15% to 20%, but Congress would have to "pay for" keeping the dividends rate at 20% under last February's new PAYGO law. There's considerable doubt whether Congress can come up with that money, so the top rate on dividends could easily rise to 39.6% next New Year's Day. That possibility is already beginning to weigh on stock market valuations. Furthermore, beginning in 2013 under the recently enacted health reform law, both capital gains and dividends of high income individuals would be subject to the 3.8% HI (health insurance) payroll tax.
The new
PAYGO law exempts paying for extending the Bush tax cuts for those under $250,000, but Congress is still having trouble mustering support for adding $2.2 trillion to the deficit and resolving the ideological battle between most Democrats, who want to raise taxes on those over $250,000, and most Republicans, who don't. The depth of this ideological battle was made clear by Congress' failure late last year to extend the estate and gift tax. It expired on January 1, 2010, but, on January 1, 2011, it will revert to 2001 law with a top rate of 55% and a $1 million exemption, quite an increase from the 45% top rate and $3.5 million exemption in 2009. The political brinksmanship over the estate tax and over the Bush tax cuts in general may not be resolved by the election. If the Republicans take the House, which many observers expect, this year's gridlock may become worse next year.
Alan Greenspan recently urged Congress to allow all of the Bush tax cuts to expire at the end of this year to avert a U.S. debt crisis he sees looming ahead. He admitted such a large tax increase would lower the growth rate of a very weak recovery. Greenspan famously helped propel Ronald Reagan's 1981 tax cuts and George W. Bush's
2001 and 2003 tax cuts, so that's quite a turnaround, which will add to the gridlock in Congress.
So what's the endgame?
In my opinion, from talking with top Hill staff in both parties, the Senate may debate, but not necessarily pass a Bush tax cut extension in September, but the House is very likely to wait until a lame duck session in December to pass a one-year extension of the Bush tax cuts for those under $250,000 ($200,000 for singles). This will maximize tax rate uncertainty for small businesses and will hit the equity markets with a 39.6% dividends top tax rate. This would be bad news for American business and for American workers. It wouldn't resolve our budgetary gridlock. It would just continue tax rate uncertainty for a very weak economy. There is also the small possibility that Congress could fail to extend the Bush tax cuts, tightening fiscal policy by 1.5% of GDP and very possibly throwing us back into recession.
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Complicated
It is all just so complicated. There is really no need for all of this. I mean, with each tax hike they are chipping away at the American dream. Are they intentionally trying to create a nation of lazy people who won't want to make any money because they just have to give it to the government who can't manage it very well?
Taxes
This is a very nice description of the core issues.
Thanks, Tom Edsall
Bush tax cuts
Obviously raising the dividend rate to 39.6% will raise quite a bit of tax. However, the increase in the top rate to 39.6% for other ordinary income will generate very little additional tax. I believe that the average AGI for people in the top 1% of taxpayers is around $325,000. Most taxpayers with AGI between $200,000 and $500,000 are in AMT. Increasing the ordinary rate to 39.6% will not raise their taxes by even one dollar. You will get additional tax from people with AGI above $500,000 but my guess is their are very few of those, definitely not emough of them to dent the budget deficit.
Lowering the long term capital gain rate to 15% had to increase tax revenue. As a CPA, I have seem more stock sales the past decade than ever before. The low rate allows people to re-balance their portfolios without a huge tax burden. If the rate goes much higher than 20% this will stop. People will just sit on their gains. No sales, no tax revenue.
Oh noes! The top bracket will
Oh noes! The top bracket will face a massive 10% increase in their taxes! OMG - they might only be able to buy TWO gold-plated Gulfstream jets next year. If only we could go back to the 50% rate of the Reagan golden years, or the 70%+ rate of the Leave It To Beaver era...