As we get nearer to election season the rhetoric surrounding one of the biggest tax issues this year is coming at us at a feverish pace. The Bush Tax Cuts are expiring this year, and without them being renewed for all taxpayers we could see one of the largest tax increases in some time. Both parties vow to at least renew the tax cuts for those making up to $250,000, but if they aren't able to come to an agreement, the tax rates will go up for everyone come January 1st. With the inability of the two parties to work together, it is starting to become a distinct possibility in my view that nothing is done in time to prevent them from going up for everyone.
Table of Contents
Bush Tax Cuts Expire January 1st. What Is To Be Done?
Within the past few days the GOP has come out with what they call a concession, a temporary 2 year extension of the tax cuts for all taxpayers. The idea is one that was promoted by Obama's former budget directory, Peter Orszag earlier this week.
House GOP Leader John Boehner offered a concession on tax cuts, suggesting Republicans would accept a two-year extension of all the Bush-era tax breaks rather than the permanent extension they have been seeking.
The GOP proposal is an alternative to Democratic leaders’ plan to allow the top two rates to rise next year to pre-Bush levels. A Republican release described Boehner’s alternative as a way to prevent “job-killing tax hikes” on small businesses.
Boehner, an Ohio Republican, outlined the plan Wednesday morning on ABC’s “Good Morning America,” a day after the White House made it clear it had no interest in a two-year extension. The idea had been floated on Tuesday by Obama’s former budget director, Peter Orszag, in an op-ed.
Obama says he instead favors permanently extending current tax levels for the middle classes, defined as families making less than $250,000, while allowing tax breaks for higher earners to expire at the end of the year. The president and Democratic congressional leaders evidently have decided they like the political contrast with the GOP, even though some of their rank-and-file members and candidates have defected to the Republican view.
The Obama administration and congressional leaders seems dead set against renewing the tax cuts for all taxpayers, saying that they want those making more than $250,000 to have their rates go back up. They've drawn a line in the sand that they don't seem willing to cross, even if some rank and file democrats and candidates seem to think an extension would be wise.
Despite their stand right now, some think that a temporary extension could become part of a deal AFTER the election, when the posturing and campaigning is done.
Despite the White House’s statements rejecting the two-year extension of all the Bush tax cuts, that could yet become the basis for a deal, probably after the November elections.
Small Business Owners Ask For Extension Of Tax Cuts
As the debate rages, small business owners are jumping into the fray. The Obama administration has trumpeted a small business lending fund that it will be pushing later this week that would make more than 30 billion available in loans to small business owners, along with tax breaks for capital investments. But independent business groups are saying that an extension of the Bush tax cuts would help them more.
The Obama administration has targeted small business with laser-like focus, pushing a $30 billion small-business lending fund in Congress and, later this week, rolling out a tax break allowing businesses to deduct 100% of qualified capital investments.
But the chief economist at the National Federation of Independent Businesses said today that small business doesn’t need more tax relief. Instead, he said, Washington should aim its firepower at consumers so they begin spending money and creating demand for the products and services small companies provide.
“If you give a small business guy $20,000 he’ll say, ‘I could buy a new delivery truck but I have nobody to deliver to,’” said William Dunkelberg, chief economist for NFIB.
Rather than aim more tax relief at business, Dunkelberg said Washington should extend the Bush-era tax cuts for everyone – including those making above $250,000.
“History shows that letting Washington have the money and spend it is very ineffective,” he said.
The administration’s latest idea, which would allow businesses to temporarily deduct 100% of “qualified” capital investments, can help “on the margin,” Dunkelberg said. With capital-spending by small business at a 35-year low, some firms will naturally take advantage of a temporary tax incentive to replace products. But Dunkelberg said he thinks most small businesses will hold on to their cash until more certain economic times
Economists Discuss an Extension Of The Bush Tax Cuts
Others, including economists have said that an extension of some sort should be considered. Economist Tom Gallagher says what form he thinks an extension should take:
They should extend the rates for the top two brackets for one year (through 2011) and the rates for the bottom four brackets for three years (through 2013). This would accomplish several things. First, it would address the uncertainty about the near-term economic outlook. Second, by de-linking the rates for the top two and bottom four brackets, it would automatically put in place something like Obama’s plan for 2012, when the economy should be able to withstand some further fiscal drag. Third, it should trigger a broader debate over deficits in the year after the presidential election, thanks to the expiration of the tax cuts for the bottom four brackets.
Only time will tell what is done, but at this point, it is looking more and more likely that any extension of the tax cuts, for everyone, or just for the lower tax brackets may have to wait until after the election. I do think we may want to consider the fact that an extension might not take place at all if no agreement can be made, and then each party will blame the other for getting nothing done. We shall see!
What do you think will happen with the Bush tax cuts? Will they expire for everyone, or be extended for only lower tax brackets? Will they be extended for everyone? Do you think they're a good idea, in combination with some form of reduction in government spending? Tell us your thoughts in the comments.