The largest piece of tax relief in the new plan would involve cuts for people who pay income taxes or who claim the earned-income credit, a refund designed to lessen the impact of payroll taxes on low- and moderate-income workers. This component would serve as a down payment on the "Making Work Pay" proposal Mr. Obama outlined during his election campaign, giving a credit of $500 per individual or $1,000 per family.
On the campaign trail, Mr. Obama said he would phase out a similar tax-credit proposal at around $200,000 per household, but aides said they haven't settled on an income cap for the latest proposal. This part of the plan is similar to a bipartisan initiative launched in early 2008, which sent out checks worth $131 billion.
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As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.
A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don't sit on their money until after Congress passes the measure.
Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.
There are several differences between these tax "cuts" and the tax cuts that Bush enacted. First, Bush's tax cuts were enacted for ten years. This is important because consumers, and businesss especially, make long term decisions. As such, they look for long term tax horizons. Obama's business tax plan is supposed to expire after one year. He is hoping to stimulate business hiring by enacting a tax for only one year. That is very unlikely to help. Businesses would look to make hiring decisions for the long term. A tax that only lasts for one year is unlikely to stimulate such a long term decision.
On the consumer side, Obama insists on revisiting the tax rebate. This is an idea that has failed no less than two times during the Bush era. He tried it at the beginning of his Presidency and this past summer. Neither time did these checks have anything more than a marginal effect on the economy. With Americans deep in debt, it is likely this check will be used to pay down debts like both other times. Furthermore, since 40% of Americans pay ABSOLUTELY NO INCOME TAXES, for the most part, this will be nothing more than a welfare check. On this level, this part of the proposal is more government spending masquerading as a tax cut.
Finally, President Designate Obama wants a retroactive larger tax write off for businesses that lost money in the last five years. This accelerated write off allows businesses to claim these losses quicker and more powerfully. While this has some merit, it also creates a tax code that is more skewed to losers. This encourages businesses to take more losses, and in large part, encourages businesses to lose money. Finally, it gives absolutely no tax incentive to those businesses that have done well over the last five years. As such, it encourages exactly the behavior we want to discourage in this market. The worst part of this proposal is how much it will complicate the business tax code. Now, there will be even more of an emphasis on write offs, carry forward losses, and certain business expenses over others. Our business tax code is complicated enough as it is and Obama just guaranteed that it will get even more complicated.
In fact, President Obama could have spent a lot less money and made things a let less complicated while at the same time creating much more stimulating tax cuts. First, he could have made all the Bush tax cuts permanent. This would have cost nothing but given tax payers peace of mind about their tax rate. Second, he could have cut the corporate tax from the mid 30% to the mid 20%. This would our own corporate tax rate more competitive with the rest of the world and would attract significantly more business into the country. Instead, Obama created a series of gimmicks that likely won't work and will only complicate the tax code even more.
"First, he could have made all the Bush tax cuts permanent."
ReplyDeleteThis is generally his tax plan, for anyone making less than $250k/year.
"Second, he could have cut the corporate tax from the mid 30% to the mid 20%."
Our effective tax rate is already mid-20%. I agree that cleaning up the tax code so it's less complicated and businesses don't have to spend so much on accounting (a regressive tax) would be good, but in general the US has very low effective corporate tax rates due to the large number of breaks allowed. This idea that the US has high corporate taxes compared to the rest of the world stems only from the fact that the base rate is 35%, except nobody pays that.
I don't know what his plan is because he hasn't been clear about what he is going to do with the Bush tax cuts. Second, if the tax cuts expire on those making more than even $250k, that is a tax increase on those folks. Those are the folks in a position to create jobs. as such, he may cut taxes on a lot of people, but he will be raising taxes on those that create jobs.
ReplyDeleteAs to your second point, I don't know what an "effective corporate tax rate" is, but our corporate tax rate is 35% making us the second highest corporate tax nation in the world.
Two indications that this is a partisan pig in a poke: First it is a mammoth document being "rushed" through the Congress with Pelosi curtailing the rights of the minority to debate the leglislation in the House.
ReplyDeleteSecond, the public is being kept in the dark about the details of the bill. Senate Republicans ought to draw the line right now and say - no rushed leglislation from Obama and the Democrats without study, debate and amendments. We can not afford partisan failure from either party at this point.
I've caught word that the bill will create 600k new government jobs and that most or some of those jobs will be Obama's promised domestic militarized "service" troops.
ReplyDeleteDuring the election he spoke of requiring "service" from the Nation's young people and he also discussed a domestic militarized group that will be "just as well armed and trained as the military." This was in addition to the National Guard! I have no idea what he meant by all this or if it is in this bill but if anything like this gets imposed on our people in the power back rooms of Congress, without public knowledge and debate, I will be furious.
I really don't want this bill rushed through Congress.