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The Lame-Duck Congress: So Many Tax Issues, So Little Time
Posted by: | CommentsAs usual in December, personal finance columns are filled with end-of-year tax advice—all those things you should do before New Year’s to cut your tax bill. But 2010’s end-of-year issues are different: This year, it’s Congress and the president who need to act fast on a long list of tax policies.
Everyone knows about the expiring Bush-era tax cuts—how taxes will jump for every taxpayer if the cuts sunset as mandated in the 2001 law. We’ve heard representatives and senators of every political stripe explain ad nauseam how extending or not extending some or all of the expiring cuts will wreak havoc on (pick one or more) our economic recovery, small business, income inequality, federal deficits, and/or the national debt.
But that’s only the tip of the tax iceberg. Other issues, in no particular order here, also demand attention:
1. Patching the alternative minimum tax (AMT): Absent Congressional action, more than 28 million taxpayers will pay an average of more than $3,700 additional tax on their 2010 returns because of the AMT. Congress has repeatedly “patched” the AMT to protect those households but hasn’t done anything yet for 2010. Leaders of the congressional tax-writing committees assured IRS Commissioner Doug Shulman last month that they would boost the 2010 exemption, sparing more than 23 million people the higher levy. Shulman took them at their word and IRS has reprogrammed its computers in anticipation. Everyone assumes the patch will emerge from the current negotiations, but if Congress fails to act, the IRS will have to hustle to re-re-program everything before processing affected returns.
2. Estate taxes: People dying in 2010 will pay no estate tax, no matter how large their estates. Already five billionaires have taken advantage of that tax hiatus and—who knows?—others may have plans to join them this month. But miss the December window and everything changes—estates worth more than $1 million will face tax rates as high as 55 percent. The president wants to return to 2009 law—a $3.5 million exemption and 45 percent tax rate—while Republicans would prefer a $5 million exemption and a 35 percent rate…or better yet, a permanent repeal. Good luck planning how to structure your estate, to say nothing of how Congress plans to replace billions of dollars of lost revenue.
3. Stimulus Tax Provisions: Tax provisions in the 2009 stimulus act, most notably the Making Work Pay credit, also expire at year’s end. Expiration of MWP alone will cut workers’ after-tax income by an aggregate $60 billion next year. Other provisions that make the child credit more refundable, expand EITC for larger families, help pay for college, and exempt $2,400 of unemployment compensation from income tax will also disappear, pulling nearly $20 billion more out of taxpayers’ pockets. President Obama wants to extend all of those tax benefits as part of the Grand Tax Compromise but budget hawks don’t like the cost.
4. Tax Extenders: Congress has yet to address the annual list of expiring tax provisions, all of which get extended every year. In theory, limiting the lives of all those tax breaks to one year lets taxwriters critically review them each year before passing them for another 12 months. More accurately, extenders require Congress to find an appropriate legislative vehicle to carry them forward. And maybe a way to pay for them, although that’s typically stripped out in the end.
All this is a lot to deal with in the next ten days. Maybe a grand compromise will solve the problem. But with extending unemployment benefits and ratifying the START treaty also on the agenda, Congress has its work cut out.
Scoring Tax Reform: Budget Baselines Don’t Really Matter
Posted by: | CommentsMy TPC colleague Howard Gleckman wrote the other day about the confusion caused by the multiple baselines advocates use to measure the effects of tax proposals. But baselines don’t really matter. What’s important is not where we start or how things change but where we end up.
Baselines are largely political. Partisans use whichever version strengthens their ability to bludgeon opponents in an essentially Inside-the-Beltway game. Voters, thoroughly confused by this arcane and complex scorekeeping, can’t figure out who’s telling the truth.
Because a baseline does give you a starting place from which to calculate change, it helps measure the effects of tax proposals. You can see that a new tax raises revenues compared to some prior year, or that it raises taxes for high-earners relative to what they paid at some time in the past. But those are often the wrong questions.
The trouble is that these starting points are entirely arbitrary. There is nothing inherently “right” or “wrong” about the tax law as it was in 2000, or in 2003, or this year. Nothing makes any of them more or less worthy as a basis for measurement. The problem with evaluating whether a given policy yields a good outcome is our lack of agreement about the right answer. A tax that strikes me as too regressive may seem too progressive to you. Federal revenues claiming 20 percent of GDP will look egregiously high to people who want smaller government but anemic to those who want government to do more.
The right question is what does a particular level and design of tax mean for individuals and the economy.
For example, letting all the 2001-03 tax cuts expire would mean federal revenues will total about 20 percent of GDP over the coming decade; making them all permanent would cut that share to roughly 18 percent. This is true no matter what baseline you start from. By contrast, President Obama’s plan to extend the cuts for all but the highest-earning 2 percent of households would claim 19 percent of GDP. Each option would also distribute taxes in its own way across households in different income categories. This is also true regardless of what baseline you start with.
What you must do is ask yourself these questions: Given growing concern about exploding federal deficits, does a particular tax policy generate enough revenue to fund the government you want? Does it collect revenues in the most efficient way so it does the least harm to the economy? And does it spread taxes fairly across the income distribution? Those queries are hard to answer but pondering them is far more useful than asking whether taxes will rise or fall relative to a baseline, or whether it will take more or less income out of the pockets of those in a particular income group than it did at some time in the past.
Of course, tax policy choices will always be political. And since we have no absolute standard for assessing taxes, any evaluations of proposed changes will always be subjective. But as you listen to the Washington debate, keep your eyes on the prize: not baselines but on where we end up.
New and Improved: Tax Calculator 2.0
Posted by: | CommentsIn response to your comments, the Tax Policy Center has revised its tax calculator.
The calculator’s popularity and use have more than pleased us but comments and questions induced us to begin updating it almost immediately after its rollout. TC2.0 incorporates three major changes. Now users will be able to:
• Simulate either 2010 or 2011 taxes—compare tax changes against tax law for either year.
• Turn the AMT patch on or off—continue the temporarily higher exemptions for the alternative minimum tax or use their lower permanent values.
• Estimate the impact of tax law changes on five built-in income levels. In addition to incomes approximating the 20th percentile, median, and 80th percentile for each of our six representative households, we’ve added two higher incomes representing the top 1 percent and the top 1/10 percent of each type of household with sources of income and itemized deductions consistent with those incomes.
As before, the calculator lets you choose one of our ready-made examples or create your own taxpayer from scratch and then compare tax bills under three tax policies—full extension of the 2001-03 tax cuts, complete expiration of those cuts, or President Obama’s tax plan.
Since we debuted the calculator in September, more than 60,000 people have run over 165,000 cases and the media have used the calculator to create examples for many tax stories. If you haven’t yet taken it for a test ride, now’s your chance to check it out. If you’re one of the thousands who have already used the calculator to compare policy alternatives, take a look at the new version and let us know what you think.