Why the Senate’s Tax Bill is No Way Out of the Fiscal Impasse

By :: December 14th, 2012

With fiscal cliff talks seemingly stalled (at least today) , there has been growing talk that House Republicans would call President Obama’s bluff and simply pass the Middle-class Tax Cut Act approved by the Senate last summer. But for all the chatter, nobody has paid much attention to what is, and is not, in that bill.

They should, because a close look at the details suggests this option may not be quite so attractive to the GOP, or to anyone else who thinks seriously about tax policy. Granted, it may be politically tempting. In the words of fellow blogger Keith Hennessey (who has great connections with GOP insiders), such a step would be “terrible but not inconceivable.”

The bill extends for one year several provisions of the 2001-2009 tax cuts. For instance, it temporarily continues the low 2001-2003 ordinary income rates for individuals making less than $200,000 or couples making less than $250,000, repeals the limits on itemized deductions and personal exemptions (aka Pease and PEP), and extends marriage penalty relief. It also temporarily extends relatively generous treatment of the child tax credit and the earned income tax credit.

The measure also raises the tax rate on capital gains and dividends to 20 percent for high income households, and retains a zero rate on investments for those with very low incomes.

However, the measure also allows the payroll tax to expire and does nothing to replace it, a step that would raise taxes on many low- and moderate-income workers. It patches the Alternative Minimum Tax, but for 2012 only. While this addresses the immediate problem for those who have to file their 2012 returns starting in a few weeks, it does nothing to patch the AMT for tax year 2013.

It also returns  the estate tax to its 2001 levels, where the exemption is only $1 million and the tax rate is 55 percent. This provision alone seems anathema to Republicans, who’d be turning their back on Obama’s proposal to raise the exemption to $3.5 million and cut the rate to 45 percent. And it won’t make many Democrats happy either.

Overall, the Tax Policy Center estimates that relative to current law (that is, where all the 2001-2010 tax cuts expire), the Senate Democrat’s bill would cut taxes by an average of about $1,000 in 2013. Not surprisingly, nobody making less than $200,000 would pay more. Those making $75,000-$100,000 would pay about $1,400 less on average. Those making $1 million or more would enjoy a tax cut of about $26,000.

Relative to current policy, (where most of the 2001-2010 tax cuts are extended) the story looks very different, however. TPC figures the typical household would pay more. The average tax increase would be about $1,200 in 2013. But millionaires would pay substantially more—about $136,000 more than under today’s tax rules.  Those making between $100,000 and $200,000 would pay about $2,500 more.

Keep in mind that TPC’s policy baseline assumes the 2010 payroll tax cut expires and the rate returns to 2009 levels. Thus, it does not reflect higher payroll taxes that would be withheld from most paychecks  if the Congress adopts last summer’s Senate bill. On average, this will cost a worker about $700 next year.

These consequences suggest this option may generate a lot less enthusiasm than some suggest in the ongoing game of political chicken.

But the real reason the bill is so problematic is that it serves as nothing more than a can to be kicked down the proverbial road. It makes no effort to set permanent tax policy, and will leave taxpayers in exactly the same situation a year from now as today, except with somewhat lighter pockets.

 

 

 

15Comments

  1. Tax Roundup, 12/14/2012: I want to lose weight. And I want more dessert! « Roth & Company, P.C  ::  8:51 am on December 14th, 2012:

    […] Howard Gleckman,  Why the Senate’s Tax Bill is No Way Out of the Fiscal Impasse […]

  2. Vivian Darkbloom  ::  10:17 am on December 14th, 2012:

    “For instance, it temporarily continues the low 2001-2003 ordinary income rates for individuals making less than $200,000 or couples making less than $250,000, repeals the limits on itemized deductions and personal exemptions (aka Pease and PEP), and extends marriage penalty relief. It also temporarily extends relatively generous treatment of the child tax credit and the earned income tax credit.”

    This is factually incorrect. The bill does *not* repeal “the limits on itemized deductions and personal exemptions (aka Pease and PEP).” The bill *amends* the PEP and Pease phase-out rules of Section 68 so that they only apply to those earning more than $200/$225/$250K, depending on filing status (as adjusted for inflation after 2009). See Sections 101(b)(1) and (2) of the proposed legislation.

    But, this just proves Howard’s point. One *should* take a closer look.

  3. AMTbuff  ::  3:08 pm on December 14th, 2012:

    I believe that Obama is prepared to violate the debt ceiling rather than accept an agreement his does not like. Obama can also maintain current withholding rates in anticipation of a tax deal. The debt ceiling and 2013 middle class tax rates are not short-term obstacles to the Administration. Neither is estate tax relief.

    AMT relief for 2012 is the only Congressional action on taxes that Obama absolutely requires before mid-2013. The Senate bill contains that AMT relief provision. Passing the Senate bill would strengthen Obama’s negotiating position on the other issues, moving the deadline back several months and opening up a remote possibility for a tax overhaul agreement by mid-2012.

    If Obama wants to be a statesman here he could ask for immediate approval of the Senate bill in exchange for his promise to sign whatever tax reform Congress approves after fast-track negotiations and a no-amendments-allowed vote on June 30, 2013. That deal would give the economy a lift.

  4. Michael Bindner  ::  3:40 pm on December 14th, 2012:

    While it is certainly not a permanent solution, it certainly tries one out as a test for its possible use in permanent tax reform. I suspect that if the GOP passed an identical bill with current inheritance tax rules rather than Clinton era rates, the Senate would accept the change and everyone would be home for Christmas. It would, of course, be nice if the savings from the Budget Control Act were booked against making the 10% tax rate and the $1000 Child Tax Credit permanent, but I don’t expect that kind of common sense to prevail. I suspect that these things will be on the table for permanent tax reform discussions in the second term – possibly the second half of the second term.

  5. TaxVox » Blog Archive » Why the Senate's Tax Bill is No Way Out of … – Let You Know Everything  ::  4:06 am on December 16th, 2012:

    […] Read More: TaxVox » Blog Archive » Why the Senate's Tax Bill is No Way Out of … […]

  6. Jim C  ::  12:27 pm on December 17th, 2012:

    If they want to tax millionaires the best ways to do it is: to disallow, as deductible corporate expense, and wages over $250,000; tax capital gains over $250,000 as ordinary income; and remove all caps for FICA.

  7. The Senate tax bill: A dreadful third option « Greg Ip  ::  4:34 pm on December 19th, 2012:

    […] Gleckman at the Tax Policy Center’s TaxVox blog breaks it down into more manageable numbers: Relative to current policy (where most of the 2001-2010 tax cuts are […]

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