Taxes are on the agenda but no one is talking about them

In the back of every Washington politician's mind is this sobering fact: Unless Congress acts, the temporary tax cuts it passed when George W. Bush was president will expire at the end of next year.

If the Democrats who control Congress do nothing and let the tax rates on the highest income brackets return to their pre-2001 levels, their Republican rivals and many Americans will slam them as tax hikers. If they prevent the legislation from expiring, however, they and any Republicans who support this approach will add $2 trillion to the already-growing federal budget deficit over the next decade. The news media and influential watchdog organizations will slam them for that. The 2001 and 2003 tax reductions are the big gorilla in the room that everyone's ignoring. But by the end of 2010, a year of midterm congressional elections, Congress must address this key economic issue.

"I think the easier course for both sides of the aisle to take is to extend at least most of the Bush tax cuts before you get to the end of 2010," said Diane Lim Rogers, the chief economist for the Concord Coalition, a nonpartisan budget watchdog group.
By passing a temporary extension of temporary tax reductions, the Obama administration and Democrats in Congress can buy time, she said, and the likely outcome is the formation of a study group to examine the kinds of extensive tax revisions that many experts argue are needed.

"There's not enough time to do serious tax reform before the Bush tax cuts expire," Lim Rogers said, adding that lawmakers are likely to be too bruised from the health care battle to pursue significant tax restructuring next year.
President Barack Obama has said that he expects to retain most of the Bush tax reductions, letting them expire only for individuals or couples who earn more than $250,000 annually in taxable income. This would apply to income taxes and to capital gains on investments, making Bush's tax cuts Obama's tax cuts.

Under Obama's plan, high earners no longer would fall into a 35 percent top tax bracket, but into new 36 percent or 39.6 percent brackets. Capital gains taxes would rise from the current 15 percent to 20 percent for long-term investments, and up to 39.6 percent for gains from short-term investments.
Businesses would like an early signal from lawmakers and the administration about what might happen, but they're not expecting one.

"That would be the best thing to do, but they're not going to do that. They've got way too much on their plate," said Martin Regalia, the chief economist for the U.S. Chamber of Commerce. "They will talk about tax reform, but I don't see them getting around to doing tax reform in an election year. They'd have to do it before March."
As part of the economic recovery efforts, Obama created a panel to look into ways that tax restructuring could boost the economy. However, the panel failed to issue a planned report in December, Lim Rogers said, and was given very little room to work. It was prevented from recommending tax increases for individuals or couples who earn less than $250,000 annually.

"There's not a very meaningful goal for that advisory panel," she said, expecting lawmakers to begin looking at a more fundamental revamp of the tax system in 2011.


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Obama proposes tax incentive to hire workers

Obama proposes tax incentive to hire workers
By STEPHEN OHLEMACHER (AP) – 4 days ago

WASHINGTON — President Barack Obama on Tuesday proposed a tax incentive for small businesses that add workers, even as Congress struggles to figure out how such an idea would work.

Lawmakers have been working for several months to develop a tax credit for businesses that hire workers, but they have been unable to figure out how to do it in a way that won't be abused.

Neither Obama nor his top advisers offered details Tuesday. They didn't say how big the tax break would be nor how it would be administered. Obama pledged to work on the issue with Congress.

"I believe it's worthwhile to create a tax incentive to encourage small businesses to add and keep employees and I'm going to work with Congress to pass one," Obama said.

Congress is running out of time to pass a jobs package this year, and the process will be even more complicated if the administration doesn't come up with details. Moreover, the Senate is preoccupied with the health care debate, making any action less likely.

Obama's other tax proposals were more familiar to lawmakers. He proposed extensions and enhancements of several tax breaks that were part of the economic stimulus package passed in February, including enhanced tax write-offs for companies that buy new equipment.

Obama also proposed eliminating capital gains taxes on small business stock, if it is purchased in 2010 and held for at least five years, expanding a tax break enacted in the stimulus package.

Majority Democrats in Congress, wary of an unemployment rate that stands at 10 percent as they enter an election year, said they would work with Obama to pass a jobs bill.

Republicans said Democratic efforts to pass a new jobs bill shows the last stimulus package was ineffective.

"We need to give the private sector confidence with permanent, long-term tax relief and immediate steps to rein in our skyrocketing deficits," said Rep. Tom Price of Georgia, chairman of the Republican Study Committee. "Temporary tax relief won't overshadow the long-term concerns of anxious employers."

Some tax experts said it would be difficult to fashion a tax credit that efficiently provides an incentive to small businesses to add workers. Do you offer a tax break for simply increasing payroll, or do companies have to hire more workers? How long must companies keep the workers? How would the requirements be enforced?

"You're trying to subsidize people for doing things they wouldn't otherwise do, but we don't know what they would otherwise do," said Eugene Steuerle, a Treasury Department official in the Reagan administration who is now co-director of the Tax Policy Center, a Washington think tank.

John H. Bishop, an economist and a professor at Cornell University, has helped develop a proposal for a tax credit for companies that increase the amount of their payroll subject to Social Security taxes. Since only the first $108,600 of a worker's pay is subject to Social Security taxes, executives couldn't get the credit by giving themselves big bonuses, he said.

Some companies could get credits simply by raising the pay of existing workers, but that would help the economy, too, Bishop said. Bishop's proposal, modeled after a similar tax credit enacted in the 1970s, has been circulating on Capitol Hill for several months.

"It does exactly what we want," Bishop said. "It focuses on hiring Americans to work now."

Copyright © 2009 The Associated Press. All rights reserved


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