Posts Tagged ‘Tax cuts’

When are tax cuts a bad thing?

December 16, 2010

When they pile on additional spending with no offsets, that’s when. The bill to extend the Bush tax cuts sailed through the Senate this week and is scheduled to be voted on in the House today. However, it is meeting with bipartisan resistance. Because of its very short-term nature, it does not create market certainty. It piles on an additional $300 billion in spending and makes no cuts to spending. Democrats complain that it extends the tax cuts for all, including small businesses that actually produce jobs. Some were so angry, in fact, that “F— the president” was heard coming out of the Democrat caucus.

Presidential hopeful Mitt Romney, writing in USA Today points out that the temporary nature of the extension removes much of the potential benefit for creating an environment that encourages growth.

Of course, delay now is better than an immediate tax hike. But because the extension is only temporary, a large portion of the investment and job growth that characteristically accompanies low taxes will be lost. When entrepreneurs and employers make decisions to start or expand an enterprise, uncertainty about tax rates translates directly into a reduced propensity to invest and to hire. With only a two-year extension, investors know that before their returns are realized, tax rates may be jacked up to the levels favored by President Obama. So while the tax deal will succeed in temporarily putting more money in the hands of consumers, it will fail to deliver its full potential for creating lasting growth.

Congressman Jason Chaffetz spoke to National Review about the bill. “I think the support is eroding,” he says. “The more people understand that one third of the cost of this bill has nothing to do with the Bush tax cuts, the more unpalatable it becomes.”

Additionally, Moody Investors Service predicts that passing this package without offsetting spending reductions could negatively impact the nation’s credit rating.

According to Bloomberg:

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” wrote Senior Credit Officer Stephen Hess. “Unless there are offsetting measures, the package will be credit- negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s AAA rating during the next two years.”

The GOP has the votes starting January 5th to make the tax cuts permanent and can pass a bill without the extra spending in a straight up or down vote. Frankly, this vote could well be referenced during the 2012 elections as evidence that the GOP learned nothing from 2006 or 2008. Whether out-of-control spending comes from Republicans or Democrats, the American people are sick and tired of larded-up bills. Make the current tax rates permanent and do it January 6th – without any more trips to the trough.

Poor hurt the most by expiration of Bush tax cuts

October 7, 2010

On Jan 1st, the Bush tax cuts are set to expire. The child tax credit will be cut in half, the standard deductions and income credits decrease and the 10 percent tax bracket – aimed at non-wealthy taxpayers – goes away.

While wealthier taxpayers pay more in taxes and stand to lose more in total dollars, the impact on low-income taxpayers will be far greater since they live on much slimmer margins.

In a new report from the Tax Foundation, author Nick Kasprak points out that in spite of repeated promises that the cuts will be extended, “the current Congress has shown itself to be unusually susceptible to gridlock so the threat of automatic, full expiration of all these cuts is quite real.” In fact, even though we heard last year that the death tax would go away completely, ten months later, Democratic leaders have yet to follow through on that promise.

If predictions for Republican wins in the Senate races in Illinois and West Virginia hold true, those new members will be sworn in immediately. That will give the GOP 43 seats in the upper chamber and the Democrats will have a very difficult time getting the 60 votes they need to pass the legislation to extend the tax cuts for the middle class, but let them expire for the “wealthy.” They will then be faced with the choice to extend the cuts for ALL, or do nothing and let them expire, hurting those at the lower end of the income scale.

“When comparing changes in after-tax income, low-income workers benefited substantially from the Bush-era tax cuts, and so they would pay much higher taxes if political gridlock allows the imminent expirations to occur on schedule,” Kasprak said.

Additionally, low-income taxpayers have benefited from many temporary stimulus measures enacted in 2009 that are also set to expire at the end of this year: a further expansion of the earned income credit for couples, greater refundability of the child tax credit, and bigger credits for college education.

The Making Work Pay credit that appears in paychecks and boosts take-home pay up to $400 for individuals and $800 for couples is also slated to expire next year.

The report shows that inaction on these tax measures will cost a married couple with two dependents earning $40,000 about $2,643. Their after-tax income would drop from $41,513 (if the cuts are extended) to $38,870.

Those cuts could have been extended if the Blue Dog coalition, led by Jim Matheson, had not hidden behind Pelosi’s skirts.


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