Tax Deal - Current Event - Report Example

Tax Deal Introduction The following brief discussion will focus on the current negotiations between the President and the White House, the executive branch of the government, and the Congress, the legislative branch of the government over taxation. It will also focus on negotiations within the legislative branch between the two houses, Senate and House of Representatives, and between the two parties, the Democrats and the Republicans. Initially, the history of the issue and the diverse aspects of it will be summarized. Then the significance of this issue will be explored. The final, concluding section of the paper will offer an overview of the situation and consider the merits of the various positions and the probable outcome. Summary In simplest terms the current debate revolves around the Presidents campaign promise to not extend significant changes to personal income tax rules that were introduced under President George W. Bush. Under President Bush two significant bills reducing personal income taxes were introduced: The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. The chart on the following page outlines the impact of these two tax bills on personal tax levels. In simplest terms the bills lowered the personal income tax rate on the lowest level of income (below USD 7,150) and on the highest levels (USD 29,050). Those earning between USD 7,150 and 29,050 remained constant. However, as is often the case with government legislation the devil is in the details. The bills also changed the dollar figures around the highest tax brackets pushing them upwards slightly. For example, in 2000 one entered the highest tax bracket if they earned USD 288, 351 but by 2003 that number had increased to USD 311,951. Therefore a person who earned USD 300,000 in both those years was paying 39.6% in 2000 but only 33% in 2003. (“Federal Tax Brackets”) US Personal Income Tax Rates: 2000, 2002, 2004 Tax Year 2000 Tax Year 2002 Tax Year 2004 Income level Tax rate Tax Rate Tax rate 1 15.00% 10.00% 10.00% 2 28.00% 15.00% 15.00% 3 31.00% 27.00% 25.00% 4 30.00% 30.00% 28.00% 5 36.00% 35.00% 33.00% 6 39.60% 38.60% over $311,950 35.00% Source: http://www.moneychimp.com/features/tax_brackets.htm. Also, under President Bush significant changes in other aspects of personal income, notably on capital gains. Capital gains tax is levied on the market value received on sale of an asset beyond its book value or purchase price. If an asset is bought for $50 and sold for $75, the realized capital gain (profit) is $25. Capital gains generally increase as ones personal wealth increases as it implies having personal wealth to invest. A person working in a minimal wage job rarely has large sums to invest. The exact opposite is true of a person who has a substantial income. Therefore, as a general rule, decreases in the capital gains tax rate benefit the wealthy and have little or no impact on those earning the least. In this sense they represent a regressive tax change by reducing the tax burden on the wealthy and having little impact on the poorest. Capital Gains Taxation in the United States from 2003 forward 2003 - 2010 2011 - 2003 - 2007 2008 - 2010 2011 - Ordinary Income Tax Rate Short-term Capital Gains Tax Rate Long-term Capital Gains Tax Rate Short-term Capital Gains Tax Rate Long-term Capital Gains Tax Rate Ordinary Income Tax Rate Short-term Capital Gains Tax Rate Long-term Capital Gains Tax Rate 10% 10% 5% 10% 0% 15% 15% 10% 15% 15% 5% 15% 0% 25% 25% 15% 25% 15% 28% 28% 20% 28% 28% 15% 28% 15% 31% 31% 20% 33% 33% 15% 33% 15% 36% 36% 20% 35% 35% 15% 35% 15% 39.6% 39.6% 20% Source: http://www.kiplinger.com/features/archives/2008/11/tax-planning-tax-law-changes4.html?kipad_id=44 These tax cuts instituted by President Bush were scheduled to end in 2011. President Obama and the Democrats campaigned on a platform of following through with this commitment. Republicans campaigned on a platform of extending them. This is the debate that has filled the media during 2010. After its poor showing in the midterm elections in 2010 the Democrats are loath to increase personal tax rates. However, they oppose extending the tax cuts permanently as the Republicans are demanding. On Sunday December 5, Senate Republican leader Mitch McConnell told Meet the Press they would be extended and the only question was how long they would be extended. (Bailey, 2010) Again, however the devil is in the details. Accepting that they cannot afford politically to increase taxes the Democrats have been trying to tie the extension of the tax cuts to other benefits for lower-earning Americans. The Democrats have attached provisions to the tax bill that would extend unemployment benefits to thirteen months in order to provide relief to the unemployed. They have also tied the bill to deductions in payroll taxes in the hopes of encouraging job creation. The precise deal, as it appears on December 7, 2010 is as follows: A two-year extension of the Bush tax cuts coupled with, $120 billion in a payroll tax cut; $56 billion in extended unemployment benefits and about $40 billion in extension of other tax credit along with the permitting of expensing of business investment. (Krugman, 2010) Significance This debate is significant on a variety of levels. First, it speaks to the relative weakening of the White House in the wake of the 2010 midterm elections. Nationally, the Democrats, the Presidents party, lost fifty seats in the House of Representatives and their majority. In the Senate, the Democrats maintained their majority while still losing six seats. (“Election Results, 2010”, 2010) Thus, the debate shows the changed relative balance between the President and the Democrats and the GOP. On another level it speaks to the traditional philosophical divide between Republicans and Democrats. Generally, the Republicans are supply-siders who see reducing taxes as the key to job creation. On the other hand, the Democrats have traditionally focused more on wealth redistribution and programs that benefit the poorer elements of American society. This has been the case since FDRs New Deal and was also the case with President Johnsons Great Society initiatives during the 1960s. It also epitomizes the nature of debate and compromise within the legislative branch of government and also between the legislative branch and the executive branch. This is, I believe, the most significant element of the tax cut debate that raged throughout 2010 and the compromise that is being settled on in December, 2010. Conclusion The compromise that has emerged is precisely that, a compromise with something for everyone and something to annoy everyone, and fundamentally avoids addressing the core issues. Ezra Klein summarized this view in the Washington Post on December 7: Youre a Democrat? The tax cuts for the rich are extended, and the estate tax deal exempts inheritances up to $5 million while cutting the rate heirs pay to 35 percent.... Youre a Republican? The tax cuts are only extended for two years, and theyre paired with 13 months of unemployment insurance, an extension of a variety of tax credits passed in the stimulus, and a new payroll tax cut -- all of them deficit-financed. Youre a deficit hawk? The deal adds more than $700 billion to the deficit. (Klein, 2010) In this sense the deal has relatively little impact on personal income: It gives a little here and takes a little there; the left hand gives and the right hand takes away. It epitomizes the pork-barreling and horse trading that typifies Congress. It also renders almost meaningless any real debate that occurred during the election campaigns in 2008 and in 2010. Writing in the New York Times on Monday December 6, 2010 Peter Baker captured the ennui the compromise represents: “this is what bipartisanship looks like in the new era: messy, combustible and painful, brought on under the threat of even more unpalatable consequences and yet still deferring the ultimate resolution for another day.” (Baker, 2010) The horse-trading has gone on fast and furiously in the Congress in the last months of 2010. The media has covered it diligently and in detail. However, the outcome has merely deferred the ultimate resolution for another day. The American economy requires decisive intervention and debating, deferring and finagling is simply a failure on the part of both the legislative and the executive branches. References Baker, Peter. (December 6, 2010). “In Tax Deal With G.O.P., a Portent for the Next 2 Years”. New York Times. Web. http://www.nytimes.com/2010/12/07/us/politics/07assess.html?hp. Bailey, Holly. (December 5, 2010). “Mitch McConnell says Bush tax cuts will be extended”. Web. http://news.yahoo.com/s/yblog_theticket/20101205/pl_yblog_theticket/mitch-mcconnell-says-bush-tax-cuts-will-be-extended. “Election Results, 2010”. (2010) The New York Times. Web. http://elections.nytimes.com/2010/results/house and http://elections.nytimes.com/2010/results/senate. “Federal Tax Brackets”. Web. http://www.moneychimp.com/features/tax_brackets.htm. Kiplinger. (March 2009). “Tax Law Changes For 2009--And Beyond”. Web. http://www.kiplinger.com/features/archives/2008/11/tax-planning-tax-law-changes4.html?kipad_id=44. Klein, Ezra. (December 7, 2010). “Wonkbook: Everything you need to know about the Bush tax cut deal”. Washington Post. Web. http://voices.washingtonpost.com/ezra-klein/2010/12/wonkbook_everything_you_need_t.html. Krugman, Paul. (December 7, 2010). “The Deal”. New York Times. Web. http://krugman.blogs.nytimes.com/2010/12/07/the-deal/?scp=2&sq=unemployment%20%22tax%20cut%22&st=cse. Read More