In ordinary human interaction, when almost everyone agrees on something, except for one part, you implement the parts everyone agrees on and discuss the remaining part until it is resolved. In the tortured, hyperbolic echo chamber we call the nation's capitol, no such logic prevails. Such is the case with the so-called debate on what to do about the Bush era tax cuts, which expire on December 31, 2010.
I say "so-called debate" because a "debate" assumes that both sides listen and respond to each other. Republicans took a stand based on their leaders' perception of the tactical interests of their party, and now in the election season, Democrats respond in kind. It may be a validly political process, but it insults the integrity of the English language to call it a debate.
The tax cut bills passed during the last presidency went through the Senate by "reconciliation" rules of procedure. Under these arcane Senate rules, the normal need to get 60 votes for cloture (the process that brings a bill to the floor for a vote) do not apply: the bill can advance by simple majority vote. However, the bill moved under reconciliation procedures must be only a fiscal (spending and revenue) measure, and must be deficit-neutral over 10 years.
Of course, there is no way a permanent tax rate reduction can be deficit-neutral. Therefore, the bill had to be written as a temporary rate change, with an expiration date. The promoters of the bill assumed that their party would still be in power when the expiration date approached, and could extend the cuts using the same procedures that were used to first enact it. If the promoters' party loses power, then the expiration creates what the British call a "sticky wicket" for the opposition, now the party in power. And so it goes.
In a common sense world, the Senate would pass the Obama administration proposal to keep the Bush tax cuts for all but the highest income taxpayers. After all, hardly anyone opposes that step. Then one could have an actual, real debate on the merits of letting the cut for the highest income group expire, or not. According to Senate Majority Leader Harry Reid, common sense is now scheduled to break out in the lame-duck session after the elections and before the new Congress is seated in January, 2011.
But suppose it doesn't. Suppose that the same political calculus that prevailed for the last 18 months continues after the election -- unlikely as that may seem. The new tax cut bill would remain stalled, and would procedurally die with the waning session of Congress. The tax cuts would then expire on New Year's Eve, and we would enter 2011 with Clinton-era tax rates.
What would happen? If you listen to the inside-the-Beltway hyperbole, all hell would break loose. But what would happen on planet Earth, in the actual United States of America?
To get a handle on this, I start with something my tax accountant told me. His clients are, for the most part, relatively wealthy people. They own their own businesses, are senior corporate executives, or are retired with substantial investments to manage. In other words, top bracket folks. Their dirty secret? Year in, year out, despite the ongoing flood of new tax rules, procedures, forms, and rates, they actually pay about 25% of their gross to Uncle Sam. How does this work? Well, he explains, his job is to advise his clients so that they can utilize the deductions, rules, and programs to their best advantage, while still fully complying with the law.
So what would you do in this situation if your nominal tax rate goes up? A lot of things, it turns out. You may put more into tax-deferred vehicles, or arrange your income to come as capital gains (lower rates).
If you don't have time to do the year-plus ahead planning for those strategies, the simplest thing is to spend more on things that generate deductions. Give more to charity. Buy a new computer. Do more business travel: go more often, stay longer, upgrade accommodations. When it comes to spending a bit more, creativity is easy.
The result is that even though the rules changed, the check to Uncle will remain about the same. And while I have described the behavior changes of the highest income taxpayers, other taxpayers can employ similar strategies. They do not have as much discretion to implement them, but they also would have a lower tax rate increase to try to offset.
In other words, Americans will do what they always have done since the Sixteenth Amendment went into effect in 1913: curse and scream -- then quietly adapt. Who knows, they might actually boost the economy by spending more in certain areas (deductible, of course).
That may explain, at least in part, the disparity between common political wisdom about tax cuts, particularly for the wealthy, and actual economic performance. A higher marginal tax rate can actually encourage spending, where a lower marginal tax rate can encourage saving. This seems to be the opposite of common sense, but it is the logic for people who are rich. In this context, "rich" simply means having sufficient resources to meet one's actual, minimal, immediate needs -- by this definition, a majority of Americans are at least somewhat rich.
Finally, if the Bush era tax cuts expired, the Obama administration would then be free to devise a tax rate policy proposal not constrained by the policy of the prior administration. Political common sense would seem to say that not only would they, but they would be very motivated to pass it early in 2011 and make it retroactive to New Year's Day.
All this will most probably turn out to be idle speculation on a sunny Friday in October. But if Harry Reid is wrong about common sense erupting in the Senate, remember -- you read it here first.
So you spend $1000 to save $300 in taxes? What a crock.
The simplist thing is to limit or eliminate as much non-income producing spending as possible. Our company has cut back on training, seminars, shows, travel, and all unjustified expenses. No Christmas party. No new hires. They understand that it is easier to increase profits now by cutting expenses than expanding sales.
On the other hand, if we are in the middle of the middle income-wise and our tax effectively goes up $3,000 or $4,000 that will most likely be our discretionary money which we have up til recently, patriotically been spending.
We'll be fine but there'll be no vacation, new computer, or other stuff like that.
The consolation for me is that the rich will have to start pulling their weight- either thru paying more taxes or spending as you suggest.
We may yet have an additional cut in income thru across the board cuts in hours so the one-two punch may be coming to those of us still working.
The middle class- those that are still working- are no longer the engine of economic growth or recovery.
If you want to keep a family business in the family, you have to plan for it years in advance. This means more than just transferring ownership to the next generation, but giving them the training and experience to actually run the business.
It makes a wonderful, redemptive movie when the plucky heir prevails against all odds. But for most real life multi-generation family businesses, the transition is about hard work, learning, cooperating, letting go, and stepping up. It may be full of small, every-day drama, but the story usually only interests the few people actually living it.
The first was proposed by President Kennedy shortly after taking office as a way to deal with the recession that hit at the end of Eisenhower's second term. Kennedy proposed a very modest tax cut, restricted to lower- and middle- income brackets. The idea was that these taxpayers would be most likely to spend their entire tax cut, maximizing the stimulative effect on the economy. The economy rebounded in 1962 and 1963. And the resulting increase in tax revenue more than offset the revenue lost to the cuts. Whether the Kennedy tax cut contributed all, some, or none of the stimulus, it gave people the idea that a tax cuts work. But people forgot how limited and carefully constrained it was.
The other tax cut that worked was in Carter's 1978 tax bill, which sharply lowered capital gain tax rates. Under Nixon, capital gains rates went up to equal the rates on ordinary income. To the surprise of nobody who follows capital markets, capital formation cratered under Nixon. It took a few years for the impact of the Carter tax bill to be felt, but no where was it more keenly felt than in venture capital. Venture capital went from almost non-existent to over $2 billion per year by the early 1980s. They funded my company.
Fredric Bastiat (1801 - 1850) was a French liberal politician and economist. The quotation is the title his last essay on political economy that touches on subjects including taxes, subsidies, public works, and more. He starts with the point that the poor economist deals only with what can be seen, but what is really important is what may not be seen, but must be foreseen.
GOP orthodoxy for the past 30 years would disagree with you on this one.
"His clients are, for the most part, relatively wealthy people. They own their own businesses, are senior corporate executives, or are retired with substantial investments to manage. In other words, top bracket folks. Their dirty secret? Year in, year out, despite the ongoing flood of new tax rules, procedures, forms, and rates, they actually pay about 25% of their gross to Uncle Sam."
Affirming what working people have always known, and stated, again here, that rich people do not pay their fair share.
If I had a dollar for every angry hater who said "I pay half my income in taxes," then I'd be rich, too.
Actually, rich people do pay almost half of their gross in taxes, if you count all forms of taxes: federal, state, local, income, property, sales, social security, Medicare, yada, yada, yada. This is after all deductions, deferrals, shelters, programs, etc. According to my tax accountant, the bite is between 40% and 48%, year in, year out.
Paying taxes is not like buying a candy bar. The pain of making the payment is completely detached from the enjoyment of the benefits. No matter how patriotic and civic minded you are, it hurts to write that check.
Conservative orthodoxy states the best government is local, yet it local taxes that are skyrocketing while federal taxes are the lowest in 60 years.
Sir, too many square pegs to be fit in round holes when one tries to defend the upside down state of affairs today.
Remember the bet Warren Buffet has posted, for a business executive who pays a lower overall tax rate than his secretary.
If Obama and Democrats put forth a plan that 1) Capped taxes at the Bush era tax levels - No new taxes on income and capital gains after this round 2) Agreed to target 3% of GDP for a deficit 3) Changed their tune on the evils of business and actually embraced business as a partner in fixing the mess rather than the whipping boy by bringing in senior business leaders for a seat at the table
They would have a complete change in the tone, tenor and support for the tax increase on the wealthy. Instead, everyone in business "knows" that give them an inch and socialism is just around the corner and that the only way to stop the desires of the left is fight it at every corner. This is simple to fix IF the White house would signal specific limits.
Let's see if the GOP adopts any of your sugestions after January 1, 2011, when THEY control Congress.
Given the past 12 years of GOP control, I'm not holding my breath.
Hey, in your list of scoialist boogeymen, you left out defecits. How come defecits ALWAYS get left out when the angry rich talk about taxes?
A 140% increase in unemployment after all these tax cuts for individuals and businesses big and small.
When do we start to recognize the very small roll taxes plays and stop using it as an excuse for poor management and avoiding risk taking. It seems there is a whole new class of "welfare" businessmen out there who want a federal gaurantee they will make money or they are just going to take their ball and go home.
Obama is the Anti-Reagan, both presided over difficult economic times. Reagan brought about a recovery, Obama is going to make it worse. They are alike in the aspect that the jacked up deficit spending by a factor of 3.
As I watch the attack ads flow I realise that the current crop of politicians are the true definition of evil: willing to deliberately damage our country and our society for their own gain.