Tax Compromise

It’s the talk of Washington right now.  Taxes.  The Bush-era tax cuts are set to expire, and Congress is scrambling trying to get legislation pushed through both houses of Congress to extend those cuts so everyone’s taxes don’t increase on January 1.  There is one problem, though… the results of the midterm election.  This is the reason this must be done quickly.  Republicans will be taking control of the House and will have more say in what is going on in the Senate.  Knowing that he will have to show that he is willing to work with Republicans and compromise on things, President Obama sat down with Congressional leaders of both parties to come up with a deal that could get passed.

The biggest sticking point has been this… President Obama and the Democrats have been wanting to keep the lower taxes for the lower and middle-class Americans and to let the tax rates for the wealthy 2% to increase.  The Republicans, on the other hand, want them all to be extended.  The cap was known as the $200,000/$250,000 cap… $200,000 for individuals and $250,000 for a couple.  Anyone making below that would have the same tax rate while anyone making above it, would have it increased.  And both parties wanted their proposal to be made permanent.  So my overall first question into this is this… What decided that the cap would be $200,000/$250,000?  Why couldn’t it be $300,000 or $400,000?  And why couldn’t it have been agreed upon that the wealthiest people (and I mean those like Warren Buffett, Ted Turner, Bill Gates, etc… who have stated publicly that they want their taxes to increase since they have the money to pay more) should have their taxes increased?  Here are the richest men in the country saying publicly that since they make the most money, their taxes should increase while ours should stay the same.  I think the government’s hearing-aid must have been off for that one.

The bill will add $858 billion to the national deficit over the next 2 years.  That’s a lot of money.  And we just said in the last election that Washington needs to control its spending and start finding better ways to pay for things.  The top 2% alone, comes to about $680-billion over the next 10-years.  And part of this deal is to extend long-term unemployment benefits for Americans.  Republicans are saying there need to be budgetary cutbacks to help pay for these unemployment extensions.  But yet, they are willing to add this $68-billion (per year) to the national deficit without blinking an eye.  To borrow a phrase… this pig just isn’t going to fly.  They can’t sit there and say that something like unemployment benefits need to be offset by budgetary cutbacks while letting $68-billion (per year) be added to it just to give the upper 2% of taxpayers a simple break.

The part of this deal that really kind of has me concerned is the Social Security tax reduction.  For those of us that work and pay into Social Security in our paychecks, there will a reduction in 2011 as to how much we pay in with each check.  This will, technically, add more money to our paychecks that we can spend.  However, since our paychecks will have more money, the government will be allowed to tax that as it normally does what is in our paychecks.  Bet you hadn’t thought of that.  And why is it a reduction in Social Security taxes to start with?  The program is already in dire need of being overhauled and is going broke.  Is it really such a good idea to be taking money from it that it needs?  Could this be the beginning of the end of Social Security?  Why not do what was done in 2009 and have a payroll tax reduction?  It still adds more money to our paychecks… which the government can get through income tax.  Basically it would be the same thing… but without having to take money from Social Security.

The other main parts of the legislation consisted of the estate tax and another year of relief in the marriage tax (or marriage penalty… something I wouldn’t know about personally).  The Democrats wanted the estate tax to return to 2009 levels… $3.5 million could pass on to heirs tax free (couples $7-million) with the remainder being taxed at 45%.  But Republicans wanted the numbers to be higher.  So, as a part of this tax legislation, the estate tax levels would be…  the first $10-million could be passed onto heirs tax free with the remainder being taxed at 35%.  Again, this is taking away money from the government at a time when revenues are already low.  Tax breaks are good, but the line must be drawn somewhere.  Otherwise, the government won’t have any money to do anything at all.  And as for the marriage tax (or marriage penalty)… it’s only a 1-year reprieve.  So it will come back at some point.

There are a few more points buried within this legislation, but I’m not going into detail on those specifically.  Though you can look this stuff up and find out more information.  Both sides (the Democrats/Obama and the Republicans) wanted their tax proposals extended permanently.  What ended up happening is that this legislation only extends everything for 2-years.  So that means this will probably be the hot topic of the 2012 Presidential elections since that is about the time they will expire.  So be ready for it… and be counting on it.

I, like probably everyone else, loves a tax cut.  It’s always nice to have extra money in my pocket.  But, overall, I’m not sure how I feel about this.  Yes, something had to be done to keep the lower and middle-classes taxes from increasing.  It definitely would have sunk our economy back down.  But since I do believe in fiscal responsibility, I’m not sure that this was the best plan to come forth.  We do have things that we must pay for… and if the government is borrowing money since revenues are down, aren’t we just having to repay it later except with interest that time around?  It is a conundrum to say the least.  The one thing I was glad for, though, was seeing both parties working together… something that hasn’t been done in quite some time in Washington.  There is a reason we have a two-party system in this country… and to sometimes get things done, there has to be compromise.  That means you have to give a little to get a little… and in the end, no one is completely happy with the outcome, but they can be somewhat satisfied.  Though, personally, I think something better could have come out of this to address keeping the tax cuts and keeping in mind fiscal responsibility, I am glad to see that something positive has come forth.

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