Taxpayer advocates sound happy about a deal to extend tax cuts that were approved by Congress in 2001 and 2003. Income redistribution advocates . . . not so much.
On Thursday morning House Democrats voted to reject the agreement President Obama announced on Monday. That agreement with Republican lawmakers would extend the tax cuts another two years, sharply reduce payroll taxes for one year, and give more favorable tax treatment to business investments.
House Democrats on Thursday came out against the agreement in a non-binding vote that occurred in a private setting and involved only the Democratic caucus, But the vote underscored the anger and frustration many Democrat lawmakers apparently feel toward the deal. Politics Daily reports the vote occurred even after Vice President Joe Biden met with Democrat lawmakers the night before to convince them to back the agreement.
That agreement includes the return of the estate tax, which had declined to zero this year. It would go to 35 percent on estates of $5 million or more. It had been slated to go to 55 percent on January 1. Republican lawmakers also agreed to extend unemployment benefits another 13 months. That cost – estimated at $60 billion — would be funded by additional government borrowing.
“It’s positive that no one’s taxes will be going up for the next two years. While permanency is better, this is what is achievable now,” said Ryan Ellis, tax policy director at Americans for Tax Reform, after Obama’s Monday evening announcement. “It’s positive that the death tax won’t be 55 percent, but 35 percent. It’s unfortunate the death tax won’t stay dead like it was in 2010. One very positive development is the full business expensing. This will have a big pro-growth boost next year.”
Labor Union Chief Upset
AFL-CIO President Richard Trumka was less sanguine.
“The tax cut deal rewards Republican obstructionism by giving the wealthy the tax breaks they demanded. It throws away precious resources needed for investments in jobs and our economy on upper income tax cuts that will do very little to propel economic growth—setting up excuses for the deficit hypocrites to argue for even more cuts to programs serving working families,” he said in a statement. It lards the tax cuts for the top 2 percent with an indefensible cut in the estate tax – giving yet another bonus to the super-rich. Taken together, this package locks in the growing income inequality that has plagued our country for at least another two years – and quite possibly much longer.”
As Thursday’s informal vote of the House Democrat lawmakers shows, there’s a chance the agreement will not remain intact. Trumka’s objections were echoed by many of Obama’s fellow Democrats, including House Speaker Nancy Pelosi (D-Calif.), who said in a statement: “Republicans have held the middle class hostage for provisions that benefit only the wealthiest 3 percent, do not create jobs and add tens of billions of dollars to the deficit.”
Pelosi said she plans to argue her position with the president and the Democratic caucus in the days ahead.
Big Payroll Tax Cut
The agreement would reduce the employee share of the payroll tax – which funds Social Security – from 6.2 percent to 4.2 percent for all workers in 2011. That amounts to a 32 percent cut in the tax rate.
Other parts of the agreement include extending a tax credit for college students to offset tuition costs, exempting 22 million taxpayers from the Alternative Minimum Tax, expanding the $1,000 child tax credit to more families, allowing up to 100 percent expensing of business investments, and extending business research and development tax credits.
Robert Genetksi, principal at Robert Genetksi & Associates and operator of ClassicalPrinciples.com, said the agreement “clears up a good deal of uncertainty surrounding tax policy. This will have a positive impact on business activity.”
He said he believes the proposed 2 percentage point cut in the payroll tax would be a positive factor but not in the way most commentators have suggested.
“The idea that consumers will spend the extra $120 billion in take home pay is accurate,” he said. “However, to pay for lower payroll taxes, the US Treasury will have to borrow an additional $120 billion. This will reduce the amount of funds available to borrowers, which will reduce their spending by $120 billion. Hence, there will be no addition to overall spending from this move. The positive impact will result from increasing the rewards for working. This helps increase productive activity and lowers inflationary pressures.”
‘Not the Prettiest Product’
Pete Sepp, executive vice president of the National Taxpayers Union, says the agreement could have been worse, but its temporary nature will blunt its effects. “The first thing that can be said about the tax-relief accord is, at least President Obama and Congressional leaders avoided a disaster — not the prettiest product from both ends of Pennsylvania Avenue, but it could have been much uglier.
“A two-year extension of current rates will definitely help to keep business and investor confidence from going deeper in the hole, but whether that confidence will actually crawl out of the hole remains to be seen. The same is true of extending the Alternative Minimum Tax ‘patch,’ which once again has kept taxpayers on the edge of their seats for too long.”
Sepp also said the payroll tax holiday “will likely be less problematic than handing out more stimulus payments, and 100 percent business expensing has solid promise, though these policies will present economic uncertainty issues of their own when they expire in just one year.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.