Taxes as a means of control

The Constitution limits the federal government’s power, but it does give Congress the power to levy taxes.  So Congress has historically used its taxing authority to pre-empt state laws and to exercise control over its citizens’ behavior.  George Will discusses an essay by David B. Kopel and Trevor Burrus entitled “Sex, Drugs, Alcohol, Gambling and Guns: The Synergistic Constitutional Effects.” [Read more...]

What all is in the Fiscal Cliff bill

The Fiscal Cliff bill did more than extend the Bush tax cuts for everyone except those who make $450,000.  Here is a useful summary of what’s in the new law:

— Tax rates will permanently rise to Clinton-era levels for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.

— The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)

— The estate tax will be set at 40 percent for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas like Sen. Max Baucus (D-Mt.).

— The sequester will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.

— The pay freeze on members of Congress, which Obama had lifted this week, will be re-imposed.

— The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.

— The Alternative Minimum Tax will be permanently patched to avoid raising taxes on the middle-class.

— The deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.

— Two limits on tax exemptions and deductions for higher-income Americans will be reimposed: Personal Exemption Phaseout (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.

—The full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year.

— Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven’t been specified.

— Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset.

— A nine-month farm bill fix will be attached to the deal, Sen. Debbie Stabenow told reporters, averting the newly dubbed milk cliff.

via Wonkbook: Everything you need to know about the fiscal cliff deal.

Congress scrambles back up the cliff

Congress stayed up late last night and at 10:35 p.m. voted 257 to 167 to approve the Fiscal Cliff compromise.  And the good thing is that since taxes automatically went up for everyone when the day began, with the expiration of the Bush tax cuts, Congressmen could keep their no-tax-hike pledges because their action was now a tax cut; that is, for everyone except those who make over $450,000. Also, people making over $250,000 may no longer claim the personal exemptions on their tax forms, so their taxes will go up slightly, allowing President Obama to keep his campaign promise.

The bill that had already been approved by the Senate also extended the Farm Bill, backing us away from the Dairy Cliff that would have doubled milk milk prices.  The automatic spending cuts that were scheduled to go into effect when the Bush tax rates expired were postponed for two months.  Nor does it raise the debt ceiling.  Nor does it do much for the deficit.  So the battles and brinkmanship will continue.

via Congress approves ‘fiscal cliff’ measure – The Washington Post.

We have jumped off the cliff

The good news is that the Republican and Democratic leadership seems to have come to an agreement about renewing the Bush tax cuts.  The bad news is that it was impossible logistically to pass a bill before midnight on New Year’s Eve when the cuts expire and automatic spending cuts kicked in.  So we have jumped off the fiscal cliff, though there is hope that Congress will clamber back up it with a retroactive action.  From CNBC:

With no vote likely on Monday night, the U.S. will technically be going over the “fiscal cliff” at midnight, sources told CNBC.

The emerging deal with the Senate would raise tax rates on family income over $450,000 a year, increase the estate tax rate and extend unemployment benefits for one year.

The parties were at an impasse over whether to put off the automatic, across-the-board spending cuts set to begin taking effect at midnight, and if so, how to pay for that. One official said talks were focused on a two-month delay in the across-the-board cuts but negotiators had yet to agree on about $24 billion in savings from elsewhere in the budget.

“Today it appears that an agreement to prevent this middle class tax hike is in sight,” Obama said in an early afternoon appearance from the White House, where he stood in front of cheering supporters.

“Over the next 12 hours, let’s see if we can get this done,” Obama said.

Obama expressed regret that the work of the administration and lawmakers won’t produce a “grand bargain” on tax-and-spend issues, but said that “with this Congress, it couldn’t happen at that time.”

Before he spoke, details of the emerging deal emerged. It would raise $600 billion in revenue over the next 10 years by increasing tax rates for individuals making more than $400,000 and households making above $450,000 annually, officials familiar with the talks said.

The deal would also delay a series of spending cuts known as the “sequester,” though a sticking point remains on how long that delay would last. McConnell said action on the sequester could continue in coming months. “Let’s pass the tax relief portion now, let’s take what’s been agreed to and get moving,” McConnell said.

Other details included increasing the estate tax rate, extending unemployment benefits for one year, officials familiar with the negotiations said. The officials, speaking on condition of anonymity, said an agreement would shield Medicare doctors from a 27 percent cut in fees and extend tax credits for research and development, as well as renewable energy.

The deal also would extend for five years a series of tax credits meant to lessen the financial burden on poorer and middle-class families, including one credit that helps people pay for college.

via Going Over the ‘Cliff,’ but Tax Agreement ‘in Sight’.

We are also going off the Dairy Cliff.   The Farm Bill has also expired when the crystal ball touched down in Times Square.  As a result, a price support mechanism devised in 1949 kicked in, whereby the U.S. government has to buy milk for $7-$8 per gallon in today’s money.  This would more than double the price of milk in the supermarket.  Reportedly, an agreement has been struck that would renew the Farm Bill, though, again, it remains for Congress to act.

The wild card in all of this is whether the party leaders can deliver the votes from their members.  Some Congressional Republicans are said to be upset that spending cuts are not being included, with some Congressional Democrats incensed at the cutoff for higher taxes being raised to $450,000 rather than the $250,000 that President Obama campaigned on.

How much the fiscal cliff will cost you

To descend from the theoretical to the tangible, here is how much your taxes will increase once the Bush tax cuts expire on Tuesday, unless Congress cuts a deal to extend them:

Annual income of $20,000 to $30,000: $1,064 average tax increase

Annual income of $40,000 to $50,000: $1,729 average tax increase. . . .

Annual income of $50,000 to $75,000: $2,399 average tax increase

Annual income of $75,000 to $100,000: $3,688 average tax increase

Annual income of $100,000 to $200,000: $6,662 average tax increase. . . .

Annual income of $200,000 to $500,000: $14,643 average tax increase

Annual income of $500,000 to $1 million: $38,969 average tax increase

Annual income of more than $1 million: $254,637 average tax increase

via What falling off the “fiscal cliff” means for you – CBS News.

If these expire, the much-reviled George W. Bush will surge in popularity once people realize how much money he kept in their pockets.  But the popularity of the president and especially Republicans will plummet.

Voting for “plan B” would not violate the pledge

In the fiscal cliff negotiations, President Obama wants to renew the Bush tax cuts for everyone except those who make $250,000.  House Speaker Boehner, in what he is calling his “plan B,” is saying that Republicans would be willing to let taxes go up for people making $1 million and more.  (He may be hoping to split the difference with a proposal once made by former House Speaker Pelosi to put the cut-off at $400,000.)

Interestingly, Grover Norquist at Americans for Tax Reform, which has been collecting pledges from Republican lawmakers that they would never vote for new taxes, is saying that a vote for plan B would not violate the pledge, presumably because the vote would be to renew the tax cuts and that letting some tax cuts expire is not the same as actively voting to raise taxes.  (But wouldn’t that logic apply to the $250,000 level also?)  Here is the ATR statement:

“Republicans supporting this bill are this week affirming to their constituents in writing that this bill — the sole purpose of which is to prevent tax increases — is consistent with the pledge they made to them. In ATR’s analysis, it is extremely difficult — if not impossible — to fault these Republicans’ assertion,” reads the statement posted on ATR’s website Wednesday morning.

“In particular, in this Congress the House has already voted twice to prevent any tax increases on any American,” the statement continues. “When viewed with this in mind, and considering this tax bill contains no tax increases of any kind — in fact, it permanently prevents them — matters become more clear. Having finally seen actual legislation in writing, ATR is now able to make its determination about a legislative proposal related to the fiscal cliff. ATR will not consider a vote for this measure a violation of the Taxpayer Protection Pledge.”

via Conservative groups, but not ATR, line up against ‘Plan B’ | The Daily Caller.

Nevertheless, other conservative groups are rejecting Plan B, and President Obama and congressional Democrats are still holding firm for the $250,000 cut-off.

Would those numbers matter to you in your support for a fiscal cliff bill?  Does the new Norquist logic make sense, or is it mere casuistry to give lawmakers a cover to break their promises?  Is letting some Americans’ taxes go up preferable to making all Americans’ taxes go up, which is what would happen on January 1 if no legislation gets passed?

UPDATE:  Boehner put his plan before Congress, but it was shot down, as even Republicans failed to support it.

 


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