Tag Archives: fiscal cliff

Chamber Statement on the Fiscal Cliff Deal

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President Obama and a divided Congress have come to an agreement on the so-called fiscal cliff. Indiana Chamber of Commerce President and CEO Kevin Brinegar reacts:

"The Indiana Chamber applauds the President and Congress for their ability to compromise in the eleventh hour. However, the measures agreed to are inadequate, some potentially counter-productive, and fall far short of addressing the long-term fiscal challenges facing our federal government.

"Despite tax increases, long-term spending remains unsustainable and a threat to our economic and national security. We must rigorously reform entitlement and social welfare programs and look for real, lasting savings across all federal activities. We can no longer borrow and spend as if there were no consequences, because the day of reckoning fast approaches. We look forward to working with our congressional delegation in the weeks and months ahead to fashion workable and responsible reforms."

In early December, the Indiana Chamber released the results of a federal tax survey, done in in partnership with Congressman Todd Young (R-9th District), who is a new appointee to the U.S. House Ways and Means Committee. The survey of Hoosier businesses revealed a willingness to share the tax burden, provided there is real and significant reduction in federal spending and substantive reform to simplify the tax code. The press release and charts detailing the results can be found online at www.indianachamber.com/federal.
 

Chamber and Rep. Young Release Business Tax Survey Results

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As President Obama calls for a “balanced approach” and shared burden to end the current federal fiscal crisis, the Indiana business community is showing willingness to make such a sacrifice, provided there is real reduction in federal spending and substantive reform to simplify the tax code. That’s the overriding message from a recent survey conducted by the Indiana Chamber of Commerce in partnership with Congressman Todd Young (R-9th District), who is a new appointee to the U.S. House Ways and Means Committee.

The electronic survey of Indiana Chamber members and the business community at-large focused on the fiscal cliff, federal tax code, tax reductions, corporate tax system and the U.S. tax structure in general. A total of 188 respondents took part, representing both larger companies (27%) and small businesses (73%).

“Raising tax rates isn’t the right way to go to raise revenue. It may be good politics, but it is lousy economics. Reforming and simplifying the tax code, which will stimulate job creation and economic growth, is the preferred and needed path for Indiana businesses and their employees,” explains Indiana Chamber President Kevin Brinegar.

“We also need to reject Washington’s usual accounting gimmicks and cut actual spending, not just cut the rate of spending growth. We must reform federal entitlement programs – Medicare, Medicaid and Social Security – to address fiscal and demographic realities.”

Survey respondents clearly determined the fiscal crisis was more a spending problem (67%) than a revenue one (less than 1%). Additionally, 33% felt both spending and revenue were the culprits.

When asked to rate the most important principles which should guide tax reform, the top four answers respondents selected were: 1) emphasize shared sacrifice; 2) emphasize global competitiveness; 3) refrain from picking winners and losers; and 4) simplify the tax code.

Many businesses and individuals find the complexity of the tax code too much of a burden, resulting in 60% of individual taxpayers and 71% of unincorporated businesses hiring out their tax compliance. In the survey, nearly 30% said tax code simplification was even more important than rate reduction; 62% labeled simplification important, but not as important as rate reduction. To that end, some 71% of businesses surveyed indicated a willingness to give up some of their favorable tax credits and/or deductions for lower individual and corporate tax rates.

Brinegar and Young both acknowledge that, despite what needs to happen, a short-term measure – extension of credits, etc. for six months, for example – to buy more time for substantive and comprehensive reform is likely the most positive outcome that can be expected this month. 

In addition to the survey of businesses, Young’s office also electronically surveyed constituents in his district with similar questions. The results from the more than 2,700 individual respondents largely echoed the findings on the business survey.

“It’s clear to me there is a real appetite right now for comprehensive tax reform,” said Young.  “As negotiations continue on the so-called ‘fiscal cliff’, tax reform paired with spending cuts isn’t just my desired approach, it’s also the approach favored by individual Hoosiers and Indiana businesses. As a new member of the Ways and Means Committee, I look forward to representing those wishes as we move forward on this front.”

A plurality of individuals said the fiscal crisis was more of a spending problem (46%) than a revenue problem (11%), while 40% said both are to blame. 

Additionally, 54% (compared to 26% opposed) of individuals support a model of tax reform similar to the House Republican proposal of eliminating deductions in order to simplify the tax code. But regardless of what approach is taken, 85.5% of individuals said they support extending most or all of the current tax rates while Congress works through the issue.

Congressman Young is using the information gathered in the survey and via constituent research to help inform his approach to these fiscal issues. Likewise, the Indiana Chamber’s lobbying efforts on federal tax reform are relying heavily on the survey findings.

Charts detailing the results of the tax surveys of business owners and Congressman Young’s individual constituents can be found online at www.indianachamber.com/federal.

What You Should Know About ‘The Cliff’

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Much has been written and said about the fiscal cliff. This summary and analysis from the Tax Foundation notes that the current situation "is the culmination of a decade of ‘temporary’ tax and budget bills that have postponed resolution of key policy differences." It looks ahead to the next steps. An example:

Estate Tax Increase
The estate of an individual who dies on December 31, 2012 will pay a federal estate tax (or death tax) of 35 percent on anything above $5.12 million. If the decedent instead passes away the next day, and Congress has not yet acted to change the law, the estate will instead owe a 55 percent tax on anything above $1 million. Even President Obama, no defender of estate tax repeal, considers this level too high: he has urged a compromise proposal of a 45 percent tax on estates over $3.5 million. Republicans generally support complete repeal of the tax.

There are few taxes that are as polarizing as the estate tax. A 2009 poll by the Tax Foundation found that the estate tax is viewed by taxpayers as the most "unfair" of all federal taxes but at the same time the estate tax seems to be a rallying point for those that agitate for redistribution through the tax code.[3] (In 2009, the estate tax raised about $20 billion, from a very small number of estates.) Opponents argue that the estate tax can break down family businesses while creating large compliance costs which are a drag on the economy.

Despite this seeming rift, there is a large and growing body of research by economists that generally lean left-of-center pointing toward repeal of the estate tax.[4] Nobel laureate economist Joseph Stiglitz, who served as chairman on Bill Clinton’s Council of Economic Advisors, authored a paper which argued that the estate tax actually increases inequality by reducing savings and driving up returns on capital (which largely benefit wealthy holders of capital).[5] Economist Larry Summers, former Treasury Secretary under President Clinton, co-authored a paper in 1981 that showed that the estate tax has severe impacts on the accumulation of privately held capital. Using Summers’ methodology, a July 2012 study by the Joint Economic Committee Republicans showed that since its inception, the estate tax has reduced the capital stock by approximately $1.1 trillion.[6]

The estate tax also encourages firms to structure as corporations instead of as family businesses, because corporations do not pay estate taxes when the person at the helm changes. Family businesses, however, can be subject to rates of over half the value of the estate when a deceased owner transfers the business to their heirs. This observation should be disconcerting to left-leaning voters, who recognize that smaller family businesses have ties to their communities. It should also concern right-leaning voters, who should see this as a distortion of the market process.

Perhaps the worst aspect of the estate tax is how uneven its impact is in practice. By utilizing careful estate planning, many wealthy taxpayers are able to shield much of their income from taxation upon their death. The people that tend to get hit the hardest are those that die unexpectedly, or, like farmers, have their assets tied up in illiquid holdings.[7] The estate planning industry has grown in size over the years as estate law becomes more complex. Three studies have even found that the compliance costs associated with the collection of the estate tax are actually higher than the amount of revenue the tax brings in.[8] Almost the entire estate planning industry can be thought of as economic waste, because it would not exist without the estate tax, and the high-skilled labor and capital utilized in that industry would be applied to other, more productive economic endeavors if the estate tax were repealed.

2011 and 2012 marked the first time in a decade that the estate tax rate and exemption level have been the same for more than one year. For 2010, the president and Congress (unintentionally) allowed the estate tax to expire completely, an outcome unexpected by most observers. While a repeat in 2013 may be desirable, exactly what happens remains to be seen.

Little From Congress Now … And Maybe Later

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If you already thought Congress was in gridlock and you could count the quantity of meaningful legislation without using too many digits, don’t expect much this week — or even post-election. So says Congressional Quarterly, an authority on all things Washington.

A portion of its analysis from last Friday:

If this September session of Congress seemed largely pointless before it even began, that feeling only got stronger this week. The Senate managed to push its veterans’ jobs bill into the second half of the month, while the House passed noncontroversial bills and took a few symbolic votes on fiscal issues in addition to moving the six-month CR (continuing resolution). If the Senate clears that stopgap bill next (this) week — which would be refreshingly well ahead of the Sept. 30 deadline for action — it’s possible that only a few more days of wheel-spinning will remain before everybody goes home to campaign for the rest of the fall.

That’s largely because the month’s other big deadline-driven decision — what to do about the expiring farm law — doesn’t seem to have an immediate solution. And some lawmakers in the know, including Collin Peterson, the top Democrat on House Agriculture, say there won’t be one before the election. That means the 2008 farm law would expire at the end of September, and federal support for dairy products and commodity crops would revert to formulas set in the 1940s, which would pay significantly more to farmers than what they get now.

If September has been uneventful, what about December? The lame duck might not produce much significant long-term legislation, either, even though both sides could make the argument that they’ll have new leverage once the election results are known. Leverage aside, the calendar is a powerful thing — especially when the holidays are ahead. And it seems increasingly improbable that Congress can write a comprehensive response to the budget sequester and the expiring tax cuts in a single hectic month. There might be dramatic votes on Christmas Eve, but the odds favor those votes being on short-term solutions to the fiscal cliff, with the 113th Congress being the forum for all the big decisions.

 

Fiscal Cliff: How Steep Are We Talking?

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The Bush tax cuts, set to expire after this year, represent only the tip of the fiscal iceberg before Congress. Unfortunately, considerable political attention is being focused on only the highest individual tax rate bracket. What’s actually at stake is of much, much more fiscal significance and can be divided into two parts.

"Taxmageddon," a nearly $500 billion per year increase in taxes starting day one of the New Year and federal spending cuts totaling more than $100 billion.

The list below outlines the variety of tax and fiscal matters that will require congressional action before the end of 2012.

To illustrate the scope of the potential dilemma: The so-called Buffet Rule to tax millionaires at a minimum effective rate of 30 percent would generate a relatively minuscule $5 billion annually. That number pales in comparison to the dollars involved with any one of the issues outlined. Examples: The payroll tax holiday costs $117 billion, the sequestration is $110 billion and another Alternative Minimum Tax (AMT) patch is $92 billion, while the extenders account for $78 billion. Or compare that potential $5 billion in new revenue to the amount of tax that simply goes uncollected each year – estimated by the U.S. Treasury to be $450 billion a year.

Many economists fear Taxmageddon alone would plunge the nation into another recession. Yet politicians continue to fight over philosophy, thus ignoring the big (dollar) picture that could have so much impact. The issues are many, the dollars are huge and the time is short. Little is likely to get done before the election. This leaves only a limited number of weeks in November and December for a lame duck Congress to resolve a collection of massive fiscal issues that have been stymied by the Washington gridlock for over two years. On the positive side, these are not new problems. They have been debated many times and a lot has been hashed out previously.

On the negative side, persistent disagreements remain. These are all politically sensitive matters, with middle grounds elusive and few details considered minor. It will entail much debate, necessarily involve negotiation and maybe even require some (dare I use the word) compromise. Can some kind of "grand bargain" be struck, or will they drive us off the fiscal cliff?

Although there are differences in viewpoint, philosophy and principle, there is a bipartisan recognition that these items must be addressed. And there is even some level of consensus on many of them. Sadly, the most probable result is that Washington policy leaders will take the approach that has been applied too many times already and choose to kick the can down the road by passing more temporary measures. But in this case that would still be far better than their other favorite practice – doing nothing. Perhaps by buying some time this go-around, policy makers can set the stage for making broad, comprehensive reforms next year. Eventually, they must take that step if they hope to avoid an even more treacherous and bigger fiscal cliff that looms somewhere on the horizon.

FISCAL ISSUES CONGRESS NEEDS TO ADDRESS

The Bush Tax Cuts
Expire, revert back to higher rates at year’s end
Current rates of 10, 15, 25, 28, 33 and 35% go back up to 15, 28, 31, 36 and 39.6 percent

Alternative Minimum Tax (AMT)
No patch in place for this tax year (2012)
Some 30 million taxpayers will pay more unless exemption amount is adjusted for inflation

Capital Gains
Revert back to higher rate at year’s end
Current rate of 15 percent goes back up to 20 percent

Qualified Dividends
Special rate expires
Current rate of 15 percent goes away, will be taxed at ordinary income rates

Estate, Gift Taxes
Revert back to higher rates and lower exclusion
Current maximum rate of 35 percent with $5M exclusion goes back up to 55 percent with only $1M exclusion

Extenders/Numerous Other Tax Provisions
Some 80 changes to deductions, credits and exclusions expire
Business examples: research and experimentation credit, $179 enhancement of the deduction for equipment. Individual examples: marriage penalty relief, child care, earned income credit

The “Doc Fix”
No extension in place
Medicare reimbursements to physicians will drop 27 percent

Federal Budget
No 2013 budget or appropriations bills have passed
Poses the threat of government shutdowns

Sequestration
The Budget Control Act of 2011 goes into effect
Will cause indiscriminant 10 percent cuts to defense and 8 percent for other non-discretionary spending

Payroll Tax Cut/Holiday
Terminates at year’s end
Rates will go back up by 2 percent

Unemployment Insurance
Extended benefits end 1/1/13
Long-term benefits scaled back when temporary benefits end

Debt Ceiling Limit
Will have to be raised by year’s end (or very early next year)
Jeopardizes credit rating and unnerves stock market

Affordable Health Care Act Taxes
Go into effect next year
Imposes 0.9 percent Medicare tax on high income individuals and a 3.8 percent Medicare contribution tax on unearned income; also a substantial new tax on medical device manufacturers