Two posts ago, the imagery of back and forth haggling over price in a Mideast bazaar was used to characterize the fight between Democrats and Republicans over issues to be resolved in this special session of Congress. Two levels of haggling were noted: 1) what issues would get resolved before final adjournment which is coming soon; and 2) what would be the specifics of the various pieces of legislation that are finalized.
Just when it seemed that the basic structure of the biggest issue of all, taxes, had been resolved, another round of haggling has appeared, although it now sounds more like shouting than haggling. And this time the escalated haggling, or shouting, is not between Democrats and Republicans, but among Democrats themselves. More specifically, between President Obama and his liberal Democratic supporters in Congress who believe the President, in coming to terms with the Republicans, has given away too much to the wealthy.
For months the featured part of the tax issue was what to do about the temporary (now running seven years) Bush tax cuts for higher income earners. Initially Obama and the Democratic congressional leadership supported extending the cuts for the middle class but were opposed to doing the same for couples reporting income of more than $250,000 a year. As the election campaigning went on and as it was becoming increasingly apparent that it was going to be a good year for the GOP which wanted all tax cuts extended, there was less Democratic insistence on ending the reductions for the higher income. Finally, after the election, with all Bush tax cuts scheduled to end on December 31, and with the GOP scheduled to take over the House next year, the issue seemed to be reduced to how long to extend the temporary reductions for all tax brackets.
A few days ago the "how long" seemed to be resolved--extend the cuts for everyone for another two years. In exchange the GOP agreed to a Democrat-backed 13 month extension of unemployment benefits affecting an estimated 7 million jobless workers over that period. But as stated in the previous posting, "It's difficult to imagine that a tax bill can make its way through Congress without efforts to turn it into a Christmas tree ('tis the season) for other pet tax-related ideas." It is the added ornamentation, along with the upper income tax extension, that has liberal congressional Democrats angry about the Obama-GOP deal which liberals see as a sell out to the wealthy.
The earlier post said that the issue of the estate tax may be too big to deal with in the short time remaining. But not only did the GOP get it put on the Christmas tree, but the specifics also got them a much better deal than could be expected. And that is a part of what troubles liberal Democrats. Prior to this year the federal estate tax exempted the first $3.5 million of an estate with anything above that taxed at 45 percent. For 2010 there was no federal estate tax at all, but beginning on January 1, the exemption is to drop to $1 million with the rate going up to 55 percent. What the GOP succeeded in selling to Obama was to get the exemption set at $5 million with the rate dropping to 35 percent. In short, the new provisions, if finally approved, would give another big tax break to the wealthy. Another ornament that aids the wealthier taxpayer is that the Obama-GOP agreement leaves the capital gains tax, a significant source of upper income wealth, at 15 percent rather than having the gains taxed at the same rate as ordinary income as long sought by many congressional Democrats.
The tree does include some tax credits that help middle income families but another ornament that seems to add to the take-home pay for middle and lower income earners also tilts to the advantage of the wealthier taxpayer. That is the ornament providing that for one year the social security tax of workers would drop 2 percentage points from 6.2 to 4.2 percent. A look at the structure of the social security tax shows again the the better off make out better. Social security is a flat rate tax and thus is regressive. A wage earner only pays on the first $106,800 of income. So a person making that limit or more will save $2,136; a person earning $50,000 saves less than half of that, $1,000. The object of the one year reduction is to provide an economic stimulus by giving people more money to spend and thus, hopefully, boosting the economy. If, however, the added income is used to pay down credit card balances or is saved, the stimulus would be lost.
Finally, does resolution (maybe) of the tax issue, help clear the way for other things Obama wants, primarily Senate ratification of the nuclear arms reduction treaty with Russia? First of all, Senate Minority Leader Mitch McConnell has said that nothing else will be considered until the tax bill and a resolution providing for continued funding of the government are finally passed. That could take some time and time is running short. Obama can forget about getting repeal of Don't Ask Don't Tell on military recruitment. There is likely to be some political maneuvering on an immigration bill, the DREAM proposal to help eligible children of undocumented parents gain citizenship, but final congressional approval is unlikely. Again, stay tuned. The bazaar is still open a bit longer.
Thanks for this analysis. Didn't realize there were so many ornaments for the wealthy on the tree. With the fragile economy, extending the upper tier tax cut for one or even two years didn't seem like such a bad idea to me. But the first $5 million of estate untaxed--what a windfall for those who need it least! Would that be permanent if the package gets through Congress?
ReplyDeleteI do buy the liberal Democrats' point that it's shameful for the Republicans to hold unemployment compensation hostage to their goal of padding the nests of the wealthy while ignoring the hypocrisy of pushing for an extension of tax cuts that will add $3 trillion to the deficit -- this after all the posturing as deficit hawks for two years.
I guess the President had it right in his address when he said everyone will find something to dislike in the package. The nature of compromise or bipartisanship, I suppose.
The estate tax issue has been around for 4-5 years and my understanding is that this will be the permanent change, unless now or later it gets ratcheted down. That seems unlikely with the GOP star in the ascendency.
ReplyDeleteWhat I notice out of all this hypocrisy of the Republicans is the silence of the Tea Party activists who were shouting about cutting the deficit and lowering the debt NOW. There have been grumblings from Sen. DeMint and Rep.Bachman against the Obama-GOP deal, two TP oral types, but I believe DeMint's perverse complaint was that the zero tax on estates this year should have been made permanent. Meanwhile, silence from the Tea Party people outside of Congress.
I can appreciate Obama's trying to get something agreed to in order to retain the unemployment benefits and some of the tax credits. But I think he did give away too much on the estate tax which should have been allowed to revert to the 2009 arrangement at least. It was also a bad deal on the dividends and capital gains tax rates. And the cut in social security has an upper income tilt, but potentially more dangerous is that when a tax is "temporarily" reduced, it is difficult to get it back to where it was (the Bush tax cuts have been "temporary for 7 years so far, with two more to go). And for the social security systtem, it can hardly afford any rate cuts, temporary or otherwise.
Yeah, Social Security is in such dire straights as the Boomers retire, it's a wonder how it should be considered for less funding. The Republican point on the estate tax--that taxes have been paid all through the accumulation of the estate, which is therefore being double taxed--does ring true with me until I realize that most people who leave sizable estates manage to avoid paying taxes on much of their earnings.
ReplyDeleteRepublicans wailing over double taxation, maybe as you say, on estates is somewhere between laughable and outrageous. For people with far less income, 80 percent of a social security benefit may be double taxed. Your paycheck is taxed fully for social security at the time you earn it and for very many receiving social security benefits 80 percent of the benefits may be taxed again as regular income if your adjusted gross income exceeds a certain amount. Not sure of that amount because of the arcane way of figuring it, but believe you are taxed for social security benefits if AGI is greater than $40-50,000 or some amount like that.
ReplyDeleteIt is hard to fathom all the cuts when the deficit is so large and alot of the richest people are even saying they will pay more taxes. It is also hard to imagine social security being cut more. Othere things should be looked at for cutting before that. As Cosmo, said, with all the baby boomers retiring that could cause a real problem for those counting on it for most of their retirement.
ReplyDeleteIt's even more difficult to fathom when the cuts have a clear tilt toward the wealthy. At least they didn't reduce the contribution to medicare which will be in more difficulty than social security not too many years down the road. Certainly the baby boomers are the ticking time bomb for both social security and medicare. The fiscal future will turn not only on where we can find places to cut spending but also the need to face reality in terms of higher taxes, the income tax included. The near term problem with raising taxes, of course, is that it is not a particularly good idea in a recession when you are trying to increase consumer spending but even when the recession eases politics will get in the way. A good place to start looking is defense spending, including what the two wars are costing, about $150 billion a year combined.
ReplyDelete