Taxpayers woke up New Year's Day to headlines proclaiming the news that President Obama and Congress had averted the fiscal cliff and relieved the fiscal uncertainty that has overshadowed our shaky economic recovery for many months. Well, I hate to be the bearer of bad news, but the recent negotiations over taxes could seem like a mere bump in the road compared to what's ahead when it comes to fiscal policy writ large.
First up is the statutory debt ceiling, which the federal government reached earlier this month, but which was delayed when Treasury Secretary Timothy Geithner issued a "debt issuance suspension period" that will extend the ceiling until late February. Still licking their wounds from the tax battle that featured the first tax rate increases on higher earners in 20 years, Republicans are sure to hold President Obama's feet to the fire in demanding steep budget cuts before they'll agree to raise the debt limit. And don't forget: Their hesitation last time around led to a first-ever downgrade of the nation's AAA credit rating.
Next up, the postponed across-the-board spending cuts (known as "sequestration") that are scheduled now to take place in March. These automatic cuts, including $55 billion this year alone in defense spending, will only be stopped if the president and Congress agree on deficit-cutting steps to replace them. Obama, who seeks a mix of more tax increases along with spending cuts, wants to scale back tax expenditures -- tax credits, deductions, and other preferences -- for upper-income Americans. Republicans have had enough of tax increases in any form. Republicans want to save big money by cutting spending -- specifically, by overhauling Medicare and Medicaid, two big-dollar programs on which Democrats are unlikely to budge.
Most depressing of all, the president and Congress have done nothing to change the status quo in our mess of a tax code. In fact, they only made it worse. Rather than simplify the tax code, the nation's leaders instead made permanent a tax system that is complicated, unfair, and economically inefficient -- if not downright economically destructive. Moreover, the bill that Congress passed and the president signed has now eliminated all but the slimmest chance of reforming this broken system for the next decade.
While the new marginal income tax rates may seem clear and straightforward, they come with other hidden taxes to which most Americans are oblivious -p such as the return of the phase-out of itemized deductions ("Pease") and of personal exemptions ("PEP") for individuals with adjusted gross incomes of more than $250,000 and couples with adjusted gross incomes of more than $300,000. Pease and PEP are sneaky provisions that eliminate legitimate deductions or personal exemptions for certain people because it's easier for lawmakers to enact hidden rate hikes than obvious ones.
"Phase-outs are burdensome for taxpayers, reduce the effectiveness of tax incentives, and make it more difficult for taxpayers to estimate their tax liabilities and pay the correct amount of withholding or estimated taxes, possibly reducing tax compliance," according to the National Taxpayer Advocate's 2008 report.
Taxpayers today have no more clarity and certainty as to what they will owe in taxes, where to invest their hard-earned dollars, or how to run their businesses than they did before the recent budget deal.
Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) have both signaled their desire to overhaul the current tax system. And while they agree on the importance of reforming the tax code to stimulate economic growth and competitiveness, they disagree on just about everything else.
This partisan divide is the driving force behind the proliferation of short-term "fixes" to which Congress has become addicted, resulting in a byzantine tax code that challenges even the most savvy tax attorneys and accountants.
The only certainty that taxpayers face this new year is that lawmakers will continue to disagree on how to create a simpler, saner tax code -- which means they will continue to give us more complexity and insanity.