Tax code spending, the fiscal cliff

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  • the impact of unfunded tax code spending on the deficit, its negative consequences on the budget process, and the.
  • Tax code spending, the fiscal cliff

    1. 1. Tax Code Spending, the Fiscal Cliff - Choices for the Future Katherine Savers McGovern Democratic Candidate U.S. House of Representatives CD-32
    2. 2. Tax Code Rate Changes EffectiveJan. 1, 2013• The Tax Code Rates will revert to those in effect in 2001.• Capital Gains Rates will be a maximum rate of 20% if held less than 5 years for most taxpayers; lower income taxpayers will have a maximum rate of 10% if held less than 5 years• Dividends paid to individuals are taxed as ordinary income
    3. 3. 2001 Tax Rate Schedule
    4. 4. 2002 Tax Rate Schedule
    5. 5. 2005 Tax Rate Schedule
    6. 6. 2005 Tax Rate Schedule
    7. 7. 2012 Tax Rate Schedule
    8. 8. WHO GETS BUDGET DISTRIBUTIONS AND TAX CODE SPENDING BENEFITS
    9. 9. UNDERSTANDING THE FISCAL CLIFF by Jonathan Wiseman, published in NYT Blog March 2012.Almost everyone who pays taxes would see a hit to take-home pay inthe first paycheck of January. The lowest income tax rate would riseto 15 percent from 10 percent. The highest rate would rise to 39.6percent from 35 percent. The 25 percent, 28 percent, and 33 percentrates would rise to 28 percent, 31 percent and 36 percentrespectively. Most capital gains taxes would rise to 20 percent from15 percent. The tax rate on dividends, now set at 15 percent, wouldjump to ordinary income tax rates, and since most dividend taxes arepaid by the wealthy, that would mean a new dividend tax rate of 39.6percent. The exemption on taxation of inherited estates would dropto $1 million from $5 million. The tax rate above that exemptionwould jump to 55 percent from 35 percent.
    10. 10. Even many of the working poor who do not earn enough to facesuch taxes would take a hit when a temporary, two-percentage-pointcut to the payroll tax that funds Social Security and Medicare expireson Jan. 1. In all, taxes would rise by as much as $6 trillion over 10years, $347 billion in 2013 alone, if the Bush-era tax cuts expirealong with the payroll tax cut, and Congress fails to deal with theexpanding alternative minimum tax, according to the CongressionalBudget Office and Decision Economics Inc., a private economicforecaster.On the spending side, most defense programs would be sliced by 9.4percent. Most non-defense programs outside the big entitlements— Social Security, Medicare and Medicaid — would be cut by 8.2percent. Medicare would be trimmed by 2 percent. Social Security,veterans benefits, military personnel, Medicaid and the ChildrensHealth Insurance Program would be exempt.
    11. 11. Even many of the working poor who do not earnenough to face such taxes would take a hit when atemporary, two-percentage-point cut to the payrolltax that funds Social Security and Medicare expires onJan. 1. In all, taxes would rise by as much as $6 trillionover 10 years, $347 billion in 2013 alone, if the Bush-era tax cuts expire along with the payroll tax cut, andCongress fails to deal with the expanding alternativeminimum tax, according to the Congressional BudgetOffice and Decision Economics Inc., a privateeconomic forecaster.
    12. 12. Most economists and the nonpartisan Congressional Budget Officepredict that if nothing is done, the twin impacts of broad taxincreases and across-the-board spending cuts would send theeconomy back into recession. The 2013 impact alone — about $600billion in tax increases and spending cuts — exceeds the projectedgrowth of the gross domestic product. The Bipartisan Policy Centerestimates that the cuts — called sequestration — could cost onemillion jobs in 2013 and 2014.The Congressional Budget Office projected that real economicgrowth would decline at an annual rate of 2.9 percent during the firsthalf of 2013. Unemployment would rise to 9.1 percent by the end ofnext year.
    13. 13. President George W. Bush and Republicans in Congress could notmuster the 60 votes in the Senate to pass Mr. Bushs initial 10-year,$1.7 trillion tax cut in 2001, so they used a parliamentary tool calledreconciliation to pass the tax cuts with a simple Senate majority of 51votes. The catch was that this meant the tax cuts would expire afterthe 10-year budget window closed in 2011. In 2003, when Mr. Bushwent back for another round of tax cuts, Republicans in Congressagain used reconciliation to avoid a Democratic filibuster andmaximized the initial size of the tax cuts by having them expire at thesame time as the first tax cuts, in 2011.After the 2010 elections, President Obama struck a deal withRepublicans to extend the tax cuts for another two years, as well asadd other tax measures, like the payroll tax cut, to help the economy.Now that extension is ending.
    14. 14. The across-the-board cuts are more complicated. Thenewly elected Republican House in 2011 refused to raisethe debt ceiling, the nations statutory borrowing limit,without legislation guaranteeing that the increase wouldbe at least matched by deficit reduction. Congress and theWhite House agreed to spending caps that shaved about$1 trillion off projected growth over 10 years. They alsocreated a special, bipartisan deficit reduction committeeto find another $1.2 trillion in savings over 10 years. If thateffort failed, savings would be guaranteed by automaticcuts to both defense and nondefense programs beginningin 2013. The so-called super-committee failed, and thegovernment is now staring at the consequences.
    15. 15. How Should We Balance Budgetary Spending forDiscretionary and Non-Discretionary ExpensesAgainst Unfunded Tax Code Spending Through:• Exclusions• Exemptions• Credits• Deductions• SubsidiesThis questions the current debate’s scope which, so far, hasbeen limited to budgetary spending and cuts thereto. Thesequestration a/k/a Fiscal Cliff focuses cuts plus the expirationof the “Bush” tax cuts – which include much more than thetax rate for the wealthiest taxpayers.
    16. 16. Based on a summary of expiring or expired provisionsin the Tax Code of credits, exemptions, exclusions,deductions, and tax rates, approximately 81 tax codeprovisions which, in one way or another, lowered therevenue which the United States Treasury wouldotherwise receive.I have seen no dollar value placed on this waiver ofrevenue, but note that the actual amount of waivedrevenue otherwise due is much larger that the 81 taxcode provisions which are expiring. Consider thatnone of the credits, exemptions, special cost basis oralternates for calculating income from producing oil ornatural gas wells are included.
    17. 17. Some strategy aside from simply cutting expenditures fromthe budget must be devised to protect future generationsfrom the consequences of the manner in which ourrepresentatives have agreed to proceed.Perhaps we should revisit the Simpson-Bowles proposal forthe simple reason that it provides a structure or frameworkupon which a plan for handling current budgetary needs andaddressing longer term deficit reduction goals.As discussed below, Simpson-Bowles, when proposed,presented choices which themselves created problems.
    18. 18. The five serious flaws of Bowles- Simpson Posted July 18, 2012 at 12:15 pm by Ethan Pollack1) It would weaken the economy by cutting way too fastThe proposal admits that Congress should not cut too soon “in order to avoid shockingthe fragile economy,” but addresses this by “waiting until 2012 to begin enactingprogrammatic spending cuts, and waiting until fiscal year 2013 before making largenominal cuts.” Given the current weak state of the economy, it’s clear that thistimetable was way off. But it’s not like this was unexpected: In Aug. 2010 (three monthsbefore the Bowles-Simpson proposal was released) the Congressional Budget Officeprojected that the unemployment rate would be still be 8.4 percent in fiscal year 2012.Of course, it was possible that the economy would outperform this projection, but itwas also possible it would underperform. Given this uncertainty, the proposal shouldhave included an economic trigger and not just a simple-minded timeline—for example,the cuts would only take effect if the economy was experiencing healthy growth andwell on its way to full recovery. At the time, EPI had recommended this trigger be set at6 percent unemployment for six months, which in retrospect looks quite prescient.
    19. 19. 2) It had an unbalanced ratio of spending cuts torevenue increasesThe advertised ratio of spending cuts to revenue increases was 3-to-1. This isn’t totallyaccurate: Excluding interest savings (which are a function of both spending and revenuedecisions) and including the additional revenue assumed in the baseline (i.e., the assumedconditions against which the proposal is measured) from the expiration of the high-incomeBush tax cuts, the ratio was closer to 55-to-45.But that’s still too heavily weighted towards spending cuts. Over the last two decades,budget deals have skimped on tax increases in favor of heavy spending cuts, and the mostrecent deal—the Budget Control Act—was 100 percent spending cuts. Furthermore, theBush tax cuts themselves account for nearly half of the total debt accrued during thisperiod. Finally, spending cuts exacerbate the massive and growing income inequality inthis country by generally falling on middle- and low-income households (Paul Ryan’sbudget, for example) while federal tax increases can be designed to ensure that high-income individuals pay their fair share.
    20. 20. 3) A completely counterproductive and politically-driven revenue capAs a policy matter, the revenue cap that Bowles-Simpson proposes—21 percent ofGDP—makes no economic sense. Remember, deficit reduction packages are supposed toreduce the deficit. Yet this provision would “prevent” future Congresses from reducingthe deficit through tax increases above 21 percent, which would effectively rule out thefederal revenue levels that nearly every single other developed country alreadyachieves—and that rising costs of health care provision all but guarantee the UnitedStates will need in coming decades. The best thing to say about this provision is thatthere isn’t an enforcement mechanism, which also suggests that even its authors didn’tthink it was good policy.
    21. 21. 4) Inexorable cuts to public investmentsThe proposal doesn’t explicitly cut items like education, infrastructure, and research anddevelopment, but it does prescribe funding levels for the broader non-securitydiscretionary (NSD) portion of the budget that houses nearly all non-defense publicinvestments. As my report last year shows, it is pretty much impossible to make drasticcuts to NSD without cutting public investments.So why do public investments matter? Because the whole economic point of deficitreduction is to improve the living standards of future generations by ensuring that we donot pass onto them high levels of debt. But financial debt isn’t the only kind of debt thatwe can pass on to them. For example, failing to maintain our infrastructure andbequeathing crumbling roads and bridges is also a form of debt. So is providing poorprospects for obtaining a decent education. Reducing the debt load on future generationsby cutting an investment in those same future generations doesn’t make them any betteroff, and thus negates the entire point of deficit reduction in the first place. Given the highreturns of public investment, it is likely the net effect on these generations will bestrongly negative.
    22. 22. 5) It would undermine retirement security bycutting Social SecurityThe Bowles-Simpson proposal wouldn’t only cut Social Security benefits, it would do so in away that harms the middle class. According to the Social Security Actuary, medium-incomeretirees would see their benefits drop by 4 percent for those who retire in 2030 to nearly 20percent for those who retire in 2080. This is largely a function of two separate cuts, both ofwhich fall on the low- and middle-class: raising the retirement age and using an alternatemethod to calculate cost of living adjustments, the so-called “chained CPI.”Proposed cuts to Social Security need to be put in the context of broader retirement security.Social Security represents one of three sources of retirement security, the other two beingdefined benefit pensions and household savings (IRAs, 401(k)s, real estate, etc.). But privatesavings do a poor job of providing actual security—just ask a near-retiree how their nest eggfared after the financial collapse—and it’s unclear how much savings the average householdcan accrue in the first place when median wages continue to stagnate. Further, defined benefitpensions are becoming less and less common as more and more companies choose to dropthem in favor of defined contribution plans (401(k)s or similar plans) which, again, providelittle actual security against economic volatility. Social Security is the last reliable source of trueretirement security for the middle class, and that means it’s more important than ever toprotect it against cuts like these.
    23. 23. Not all badI would be remiss to point out that there are some good elements of the Bowles-Simpsonplan. It raises nearly $2 trillion relative to current policy (which assumes all expiring tax cuts,such as the Bush tax cuts, are extended) and equalizes the taxation on capital and laborincome (though it still fails to ensure that the rich pay their fair share, given the increase inincome inequality by dedicating extra revenue gained from broadening the tax base toreducing marginal rates). It aggressively cuts defense spending. It raises the gas tax, thusshoring up the Highway Trust Fund and making transportation reauthorization an easier lift.It largely spares—and even builds on—the Affordable Care Act. Finally, while the ratio ofspending cuts to revenue increases is flawed, it is better than most of the other “grandbargain” proposals—including some reported offers made by the Obama administration—that have come out in the last few years, which focus much more heavily on spending cuts.But these strengths do not make up for Bowles-Simpson’s weaknesses, and being the “least-bad” budget proposal taken seriously by Beltway pundits is an achievement on the order ofbeing the tallest leprechaun. Without significant changes, it would cost jobs, reduce long-run investment and economic growth, and endanger middle-class retirement security.

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