One thing that hasn't received very much notice lately I think is the fact that at the end of 2010, the 2001 Bush tax cuts will be expiring for all taxpayers. If you remember, the tax cuts were across the board for all taxpayers, meaning if they aren't renewed, all of us who pay taxes will be seeing an increase in our taxes next year.
Thankfully for many of us Obama has declared that he wants to renew the tax cuts for all taxpayers making less than $250,000 a year.
Obama wants tax breaks proposed by President George W. Bush to expire this year. His budget would eliminate tax breaks on those making more than $250,000 a year, a move almost certain to be opposed by Republicans and perhaps some Democrats as the economy crawls out of the recession.
“We extend middle-class tax cuts in this budget,” Obama said Monday at the White House, but “we will not continue costly tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can't afford it.”
While that's all fine and good, the tax cuts haven't been extended yet, and some are wondering if in the end they actually will be.
To prepare you for either scenario, here's a graphic from springfieldnewssun.com showing what everyone's tax rates will be if all tax cuts expire, along with if only the tax cuts for those making less than $250,000 (joint) are extended. Personally, I hope they're extended.
What Effect Will Tax Increases Have?
There is a lot of debate as to what effect tax increases will have on the economy, as fragile as it is. Right now it seems that no one wants to allow the tax cuts for lower incomes expire (no one wants to raise taxes on the middle class in an election year!), but the question about tax increases on higher incomes is a contentious one. Democrats are saying it is needed to help close the deficit and Republicans saying tax increases would cripple our economy. I suspect the truth lies somewhere in between.
President Barack Obama wants Congress to extend the lower tax rates for individuals earning less than $200,000 a year and families making less than $250,000 annually.
But under his plan, those individuals making more than $200,000 a year and families above $250,000 would pay higher taxes on income, capital gains and dividends.
By contrast, congressional Republicans are pressing to extend all the tax cuts for everyone. They insist it is folly to raise anyone’s taxes as the economy struggles to recover from last year’s crippling recession. They contend that taking money from anybody will hinder private investment, which will slow economic growth.
Making the debate even more complicated are deficit projections by the nonpartisan Congressional Budget Office.
The CBO predicts that if Congress approves Obama’s budget — including keeping the lower tax rates for families under $250,000 — the federal treasury will lose a staggering $2.2 trillion in the next 10 years.
Joel Slemrod, a professor of economics at the University of Michigan argues that increases on the wealthy are painful but necessary:
Obama’s approach of raising taxes only on the wealthy is probably the safest bet. While acknowledging that the economy will remain shaky next year, Slemrod said “not raising any taxes in the face of this fiscal imbalance also has economic effects.’’
“We start to play out a scenario where interest rates go up,’’ Slemrod said. “So it’s not as if increasing taxes has certain adverse impacts, but not raising taxes do not.’’
Other economists argue that tax increases in this economy would be crippling, and what we really need to be focusing on is decreasing government spending.
Marc Poitras at the University of Dayton, argue that raising any taxes now can choke off the recovery.
“There is no economic model out there of whatever flavor — Keynesian or otherwise — that says that a tax increase is stimulative,’’ Poitras said. “In the long run, they have to do something about the deficit because the deficits they are running are totally unsustainable. The problem with the budget is more of spending (problem) than taxing. It will not be solved until they bring spending under control.’’
To me that is the key to this whole debate, and something that isn't brought up enough. Far too often we focus simply on whether we should raise or lower taxes, when the elephant in the room is the high rate of government spending. We need to closely examine where we are now and where we are going if government spending continues to increase at the current rate. In my opinion it's unsustainable.
What are your thoughts on the expiration of the Bush tax cuts? Do you think they'll extend them for some people – or for everyone? What effect do you think they'll have on the economy? Tell us your thoughts in the comments.