Monday, December 31, 2012

Fiscal cliff deal analysis

Highlights of the deal include:
—Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
This first highlight is one that I can get behind.  Of course, I’m not sure how much of a difference this will make in actually reducing the deficit.  There aren’t many wealthy people that actually pay 35 percent taxes on their income.  Capping itemized deductions will probably have a greater impact than raising the rate.  Of course, for many wealthy individuals, this won’t have much if any effect since a large portion of their income comes from capital gains and dividend income.
—Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
No problem here, as well.  I don’t understand how it is that the heirs of people who actually did build a large estate can feel such a sense of entitlement when it comes to their inheritance, and yet complain about the sense of entitlement that many feel about being able to buy food.  Something has got to give and, at least for now, this seems to be the right way to go.

—Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
This one is a bit trickier.  Raising dividend taxes will likely result in changes to dividend policy by corporations.  Rather than pay dividends, more companies will likely opt for share repurchases, which is another way of distributing cash on hand to investors.  Then, the only time investors will have to actually pay taxes on that money is when they sell their investments.  Of course, the higher rate on capital gains should recapture the lost tax revenue from reduced dividend payments, but it may actually result in less realization of capital gains, with investors being less inclined to sell and take a gain.  I guess, if we carry this logic through, this would lead to an increase in the size of estates, which would eventually lead to an increase in estate taxes collected.  So, in the end, perhaps it will lead to higher revenues, but those increases will likely be further in the future.

—Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
The alternative minimum tax is really kind of ridiculous.  The tax law provides people with a way to avoid paying taxes, so then our lawmakers turn around and pass this law to prevent people from taking full advantage of the law.  I’m not sure what the logic of leaving those loopholes that the AMT is supposed to help close available to middle and upper middle income taxpayers is.  And I’m not sure that middle and upper middle income people really need to be protected from an average tax increase of $3,000.  Somebody does have to pay the bills here.

—Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, earned income tax credit, and an up to $2,500 tax credit for college tuition. Also extends for one year accelerated "bonus" depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.

I really don’t see the benefit of the child tax credit, let alone any expansion of that credit.  I mean, really, do we want to encourage poor people to have more children?  And after all, Obamacare, the last I heard, requires health insurance to cover contraceptives.  This is just politics in action.  There’s no real sense to expanding the child tax credit.  If you can’t afford to have kids, then don’t; your insurance will cover the “don’t have kids” part, at everyone else’s expense.

The tax credit for college tuition was a bad idea from the very beginning.  We can see the result clearly now: skyrocketing tuition and a concomitant loss of worth in having a degree.

The accelerated “bonus” depreciation of business investments is a good thing, in my opinion.  It makes sense for businesses to depreciate assets over the life of those assets, but it doesn’t make sense to do that for tax purposes.  From a financial point of view, being able to expense business assets for tax purposes would result in more projects being worthy of investment, thus leading to increased business activity.  Really, I think this “bonus” depreciation should be made permanent.

A tax credit for research and development costs sounds like it might be a good idea; then again, it may encourage spending for research in areas that aren’t really likely to yield substantial benefits.  This is probably another example of an area where the government really should just butt out.  As far as tax credits for renewable energy goes… well, if those renewable energy sources were economically viable, there wouldn’t be a need to provide a tax credit to encourage development.
—Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
At this point, I don’t think it would be a very good idea to just allow unemployment to end for so many people.  The problem, as I see it, is that unemployment benefits should never have been extended so long to begin with.  Unemployment seems to be becoming a retirement plan.  It wasn’t meant to support people for so long; it was meant to provide a bridge between jobs.  It needs to get back to that point as soon as possible.
—Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
I don’t know enough about this to even comment, other than to say I don’t see why everything seems to be patched together and if we don’t keep passing new laws then the law will revert to some antiquated method.  We could avoid this kind of thing by making permanent changes.
—Social Security payroll tax cut: Allows a 2 percentage point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2 percent.
This is a bad idea.  For lower income people, this means 2 percent less to spend, and for many of them, they’re already only spending what they need to spend to survive.  This is, in fact one of the ways that the government can actually remove money from the economy, making it smaller, resulting in recession.  I realize that, if we’re going to have Social Security, it needs to be funded.  I’m just not sure Social Security is a great idea to begin with.  Regardless, a big part of this tax increase will actually come from money that would have otherwise been spent, so I don’t see why we want to do this now.

Most of what I see here doesn’t seem to really address the real problems that our economy is facing.  If the result is that we are supposed to be reducing our deficit, then why are so many special interest tax credits a part of the deal?  Taxes should be reduced for the people that would spend that money, while taxes should be increased on people who would just be adding to their personal cash stash.

Of course, things may be significantly different now, since the talks are proceeding as I'm writing this.  And, of course, from what I see here, there really hasn't been much progress towards actually reducing the deficit.

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