Thanks to her dogmatic rigidity and unquenchable passion for class warfare, House Speaker Nancy Pelosi continues insisting on extending the Bush tax cuts only for those who make less than $250,000. Mrs. Pelosi doesn't have the votes to pass her proposal using a special House rule, the suspension calendar, which requires a supermajority and does not permit amendments. She might well lose if the bill proceeds through normal House rules—Democrats could join with Republicans to offer an amendment allowing an up-or-down vote on extending all the Bush-era tax cuts, which could pass.Even if she pushes it through, it won't get through the Senate because Mitch McConnell has gotten all 42 Republican senators to agree not to vote for a bill that does not extend all the Bush tax cuts. Here is what will happen if Pelosi continues to block such an extension.
If that happens, every worker will receive a smaller paycheck in the New Year. This will happen regardless of what action the new Congress takes—because the Treasury Department must very soon send employers and payroll processers instructions for 2011 tax withholding. If no bill passes in the next 10 days, the Treasury Department will have to assume the Bush tax cuts expire and order more withheld from everyone's pay.Then there is the Alternative Minimum Tax which is set to include many more people if Congress doesn't pass a patch to let those middle-class workers off the hook that Congress had crafted with them a long time ago without adjusting the AMT for inflation.
The impact would be dramatic. H&R Block's Tax Institute, for example, has estimated that a married couple earning $80,000 will receive $221.48 less in each bimonthly paycheck starting in January, just when Christmas bills show up.
Then there are the households—as many as 27 million—that the Congressional Budget Office says may get walloped by the Alternative Minimum Tax if it is not adjusted to exempt middle-class earners.Yes, Congress could get around to fixing the AMT patch next year, but the damage would already be done while the economy is trying to work up some steam.
Congress normally enacts a so-called patch to the AMT early in the calendar year. But this year Mr. Obama and the Democratic Congress dawdled. Even if the new Congress patches the AMT in January, Internal Revenue Service Commissioner Douglas H. Shulman warns that one of every six taxpayers may be prevented from filing returns early or getting timely refunds as his agency scrambles to gear up for the change.
Taxpayers could end up forking over tens of billions that they'll eventually get refunded once the IRS sorts it all out—but in the meantime consumer spending, job creation and the economy will take a hit.Instead of focusing on these questions, the Pelosi and Reid Democrats are working on a whole list of other issues like the DREAM Act, repealing Don't Ask Don't Tell and food safety. And don't forget that they never got around to passing next year's budget. Remember all this when they try to tell us how they're focused like a laser on improving the economy and how they want to help small business. Everything they do seems aimed at increasing uncertainty.
If Congress fails to act on the expiring Bush tax cuts, the new GOP House majority that takes office Jan. 4 will immediately act to extend the Bush tax cuts, retroactive to New Year's Day. It will also patch the AMT to protect taxpayers' 2010 earnings. The Republicans' bill will likely gain Senate passage and Mr. Obama's reluctant signature.
But it will take weeks to reprogram payroll computers and months to work through the IRS's difficulties. That's a bad way for the economy—and the president—to start the year.
Oh, and if you are perhaps buying into the Democratic rhetoric about only taxing millionaires not affecting the economy, think again.
Mr. Schumer argues that if the income threshold for higher taxes is raised to $1 million, Republicans will no longer be able to claim that this plan taxes small business income.And the Democrats never seem to learn that their might predictions of how much money could be raised from taxing the rich never come to fruition. They seem to continually forget that rich people can hire tax attorneys and accountants.
Not so. The Small Business Administration classifies a small business as an entity with fewer than 500 employees. The Schumer plan shifts the tax onto larger, more profitable firms from relatively smaller ones. But this still puts jobs at risk. A business with $1 million or $10 million of net income has many times more employees and does a lot more hiring than a business with, say, $60,000 of net income or one that is losing money.
The Tax Foundation estimates that of tax filers reporting income of more than $1 million a year, about 80% have business income and that more than 60% of millionaire income is either business or investment income. So about two of every three dollars raised would come directly out of business coffers—i.e., from the capital that businesses need to expand their operations.
Democrats say a millionaire surtax would raise about $50 billion a year, but don't count on it. Millionaires tend to be financially sophisticated and are well equipped to respond to higher rates by finding tax shelters, exploiting loopholes (municipal bonds!) or simply working less. If high tax rates were irrelevant to economic decisions, the soak-the-rich states of New York, New Jersey and California wouldn't be losing millionaires to better tax climates.Instead of searching for some way to raise taxes on somebody, Congress should focus on giving businesses some certainty so that they can figure out how to invest money and help the economy grow.
Tax payments by millionaire households more than doubled to $273 billion in 2007 from $132 billion after the tax rates were cut in 2003. The number of tax returns with $1 million or more in annual reported income doubled over that period thanks to the strong economic rebound. Tax payments by millionaires also increased dramatically after the Reagan and Kennedy tax rate reductions.
Republicans shouldn't oversell an extension of the current tax rates as an economic panacea. Making the lower rates permanent would do far more for economic growth by removing one more source of uncertainty. And there are many spending and regulatory threats to growth that must be removed. But at least an extension would avoid a tax blow to a recovery that is still struggling to become a sustainable expansion.