Tax Cuts to the Rescue

Today’s economic news is not so much about GDP, the stock and bond markets, gas prices, or even jobs per se, but is more about taxes.  What to do with the expiring Bush tax cuts seems to be what everyone is talking about.  Complicating matters is the fact that the Bush tax cuts included a reduction in taxes on capital gains, dividends, personal income taxes, estate taxes, and more and since congress doesn’t ever want to be accused of doing anything proactively, they have waited until the 12th hour to try and deal with this issue.  Finally, however, a deal seems to be in the works to “solve” the problem.

The Bush tax cuts were created in a series of legislation in 2001 and 2003 and included sunset provisions that effectively cause the cuts to expire on January 1st, 2011.  If nothing is done, the tax rates would revert to 2001 rates and levels (generally) and workers, investors, and estates would all see their taxes rise.  One of the most complicated items from the cuts was the estate tax.  The estate tax rates were cut and the size at which an estate became taxable rose throughout the last several years and then, in 2010, the estate tax itself went away.  Unfortunately, beginning in 2011 the estate tax rate and size of a taxable estate revert to 2001 levels which would see a maximum tax rate of 55% and taxable estates beginning at $1 million.  Other tax rates that went into effect in either 2001 or 2003 were a reduction in capital gains taxes to either 15% or 5% depending upon income and personal income tax rates that were reduced across the board and included a new 10% rate.  All of these rates would revert to the higher levels that were in effect in 2001 or 2003 unless congress acts and the president signs the legislation to prolong the cuts.

Political pressures and commentary from both sides of the aisle sometimes distort issues and that is certainly the case with this issue.  One side supports the cuts and doesn’t want any change to them other than extending them or making them permanent.  They argue that this will promote job creation and help to stimulate the economy and therefore help Washington to get its house in a fiscally better state.  The other side supports some of the cuts but also wants to let some of the cuts expire in a similar effort to create a better state of affairs in Washington.  While it seems that the two sides aren’t that far apart, the rhetoric causes distortion on both sides and makes it harder for them to get anything done.  Throw in the recent election results and the fact that it is a lame duck congress trying to deal with this and it is easy to see how it has become so difficult of an issue to take care of.

News out this week indicates that a deal may be in the works to at least, temporarily extend all of the cuts in exchange for an extension on unemployment benefits.  While nothing has been completed, it is an encouraging sign that something may actually get done before the end of the year.  Finally, one interesting tidbit that is being talked about is a reduction in social security taxes for one year on workers but not on the portion that businesses pay.  While I am all for lowering my taxes, I question why they wouldn’t extend at least a portion of this cut to businesses.  After all, aren’t we trying to create jobs or at least give businesses an incentive to create jobs?  By lowering this specific tax that businesses pay, one would think that there would be the potential for job creation. 

While we await the upcoming Rose Bowl and another Badger victory, it will be interesting to watch and see whether or not congress and the president will provide us with a nice Christmas present through an extension of the Bush tax cuts.

What do you think?  Will the tax cuts expire permanently?  Will congress and the president act by the end of the year?  Will the Badgers win big again?

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