It’s Fix the Tax Code Friday!
Remember that study that I cited from the Tax Foundation earlier in the week? That same report offered another statistic. In 2007, the cost of balancing the budget would have cost each taxpayer an additional $1,789 in taxes. This year, due to “the bailouts and the Troubled Asset Relief program under the Bush administration, as well as the stimulus and fiscal year 2009 omnibus spending bills under the Obama administration”, that number has skyrocketed to $8,798. Yep, $8,798 extra to balance the budget.
Is it worth it?
Today’s Fix the Tax Code Friday question is:
Would you be willing to pony up $8,798 in extra taxes to balance the budget? If not, what about would you be willing, if any, to put up?
(Psst, in case you’re wondering, the Tax Foundation study found that 6% of taxpayers would be willing to pay the whole thing.)
Just days after President Obama outlined his proposed budget, which includes tax modifications (yeah, it’s a cheesy word, keep reading) for high wage earners, key leaders in Congress are making noise that they might not be in support of the plan. Chief among them is Senate Finance Committee Chairman Max Baucus (D-MT) who questioned whether the plan would work.
The White House is touting the plan as necessary to make a dent in a spiraling deficit and to pay for the cost of health care reform. At least half of the funds for those are expected to come from revenue raised from the tax increase.
But is it a tax increase? Phase one of the plan is to increase the top tax rate on individual taxpayers earning more than $200,000 and married taxpayers making more than $250,000 from 35% to 39.6%. Opponents of the increase say that Obama is singling out successful taxpayers. But the White House is careful to point out that the “increase” is actually the result of the expiration of a tax cut enacted under President Bush. The Bush tax cuts were not made permanent and are scheduled to sunset back to the original rates in 2011. In other words, those rates will increase if Congress doesn’t do anything at all (a pretty good bet).
More problematic for the Obama administration is the plan to limit deductions. As previously blogged, the White House has proposed limiting deductions for charitable donations, mortgage interest and state and local taxes. Under the current rate structure, taxpayers in a 35% tax bracket save $350 for each corresponding $1000 in deductions. Reducing the deduction limit to 28% means that taxpayers in the highest brackets would lose $70 in tax savings for each $1000 in deductions. Interestingly, these are the same deduction limits that were in effect during the Reagan years (though the top rates were lower).
Republicans have criticized the plan, citing concerns about the effects on charitable donations. Democrats have echoed these concerns, making it clear that the proposal is by no means a done deal.
Here’s my prediction: Congress does nothing. Sure, that’s a good prediction at the best of times. But this time, I’m serious. If Congress does nothing, the top rates go up anyway and the deductions remain at their current rates. Voila! Congress at work.
In a surprise move, the Bush administration has indicated that it might use taxpayer dollars previously earmarked for banks through the Troubled Asset Relief Program or TARP, to save the Big 3 automakers.
No, no, don’t read it again. You got it right the first time.
The White House had initially said “no way” to the auto industry pleas for a bailout. Maybe it’s the snow falling outside, maybe it’s the holiday spirit… or maybe it’s just the crappy economy… but the administration has now reversed its position on the automakers bailout.
The announcement came one day after the Senate voted no on a bailout.
The White House warned that a “precipitous collapse of this industry would have a severe impact on our economy” and said:
Given the current weakened state of the U.S. economy, we will consider other options if necessary — including use of the TARP program — to prevent a collapse of troubled automakers.
Details – including how much and how fast – haven’t been made available yet.
GM, of course, was thrilled. GM claims that it will need $4 billion in government aid by the end of the year – and $6 billion more in early 2009. Chrysler has indicated that it needs $4 billion in 2009. Ford Motors says that it anticipates that it can hold on through the end of the year and most of 2009 (rumor has it – and it’s just rumor – that the company has been kept afloat by my own family who has continuously owned Fords for as long as I can remember, including two ugly-colored Pinto station wagons and one deep blue Granada with vinyl seats).
So, it’s holiday cheers all around, right?
Not quite. Notwithstanding the idea that many in Congress, including Republicans, are reportedly angry at Bush for stepping in at the 11th hour, there are practical issues. Only half of the TARP money is available without further approval from Congress – that was part of the original deal with the Treasury. Only $15 billion of the $350 billion remains – it is, after all, the season of spending. So, the ultimate say will go back to Congress in early January for approval. Whether Congress is ready for a compromise at that time is anyone’s guess.
What is clear is that the automotive industry is breathing a sigh of relief from a near miss this holiday season. Whether voters – who are also taxpayers and consumers – will agree is another matter altogether.
Even though many politicians – including President Bush – are still reticent to use the “R” word (recession), economic pundits, including those in the Bush administration are using it. Ed Lazear, President Bush’s chief economic adviser, has been quoted as saying that “parts of the country” are in a recession.
With the threat (or reality, depending on where you land) of a recession looming, there is now a rush to consider a second stimulus package. Federal Reserve Chairman Ben Bernanke has told Congressional leaders that “consideration of a fiscal package by the Congress at this juncture seems appropriate.” He did not, however, use the “R” word, instead referring economy as in a “protracted slowdown.” His suggestions for a stimulus package include direct lending from the federal government to states (a measure that Governor Schwarzenegger of California also supports), consumers and businesses; he has also backed the idea of additional tax credits.
As Bernanke made his announcement, it seems that even President Bush is warming to the idea of a second stimulus package. Just two months after the President objected to the idea of a second stimulus package, the White House has signaled that President Bush would now be “open” to the idea of an additional package. The administration has not agreed to any specific plan and has not indicated which details he would approve.
The Democrats have floated several plans but have not reached a conclusion as to the best overall package. One version included a small rebate check but was not expected to pass and has, in recent weeks largely been ignored. The most recent plan proposed by House Speaker Pelosi focused on extending jobless benefits and increasing infrastructure spending but does not include rebate checks.
The Republicans have been much more apprehensive about a second stimulus plan. Most in the GOP are not on board with the Democratic proposals. Instead, the GOP wants to focus on additional tax breaks including a temporary elimination of capital gains tax on stocks. They have also suggested offering capital gains exclusions for taxpayers with multiple residences in an effort to reduce foreclosures by those who own more than one home.
With such disparate proposals on board, it’s highly unlikely that a resolution will be reached before the end of the year. Democrats have indicated that they are hopeful that if Obama wins the White House, they may have leverage to pass legislation within two weeks of the election – Congress is off session until after the elections. However, the reality is that no matter who wins, Bush will remain in the White House through mid-January. His approval would be needed for any stimulus package as the threat of veto would remain so a compromise will be necessary.
So, there are lots of reports being circulated about what could happen. But to be clear, despite rumors to the contrary, no second stimulus package has been approved and no additional stimulus checks are being mailed as a result. Keep checking back for details as they become available.
