The other day, I was talking to a guy who closely watches Washington for big foreign investors. Like most of us, his clients are struggling to understand the debate over the fate of the debt limit. He told me about one investor who asked whether it would be considered a default if Treasury made its regular interest payments but failed to pay other creditors.
RECOMMENDED: Debt ceiling 101: 12 questions about what's going on
If you recently heard the news that Congress is debating the merits of raising the debt ceiling, don’t think you have time-traveled back to 2011 or to 2012. In the absence of Congressional action, and barring some extraordinary measures, the debt ceiling is set to be breached sometime in the next several weeks, and the U.S. stands to gain nothing by not raising it.
The debt limit “debate” is not about limiting the size of government, entitlement reforms, or tax reform. The proof of that is that there are no major items like that on the table right now.
Instead, Republicans in Congress are yet again debating whether Congress should authorize the government to pay for spending—wait for it—that Congress has already authorized the government to undertake! Yes, it really is that silly of a situation.
RECOMMENDED: Government shutdown quiz
It is also cowardly—if the Republicans don’t want the spending to occur, they should specify the spending cuts, not put the United States in a literally impossible position by saying “you must spend this amount of money, but you are not authorized to finance that spending via taxes or borrowing.” When other countries authorize spending, they typically proceed by implicitly authorizing the increase in borrowing needed to fund such spending. Of the advanced economies, only Denmark has a mechanism like our debt ceiling, and it has never been used as a negotiating tactic for spending cuts. ( Continue… )
President Obama must continue to refuse to negotiate policy while the government is shut down. If he does not hold firm on this principle, these mindless and grossly inefficient closures threaten to become the new normal. Real shutdowns—and not just vague threats of closures– could well become a standard part of the annual budget process.
And it may not end there. If shutdowns become routine, attention-seeking lawmakers (are there any other kind?) will only escalate their threats. Breaching the debt limit then becomes the next target of opportunity. In just two weeks, we may be there as well.
This is not an argument for retaining the Affordable Care Act or any of its provisions—the issue ostensibly behind the current stalemate. It is an argument for not slipping into ever-more paralyzing fiscal gridlock. In this case, the process matters far more than the immediate policy controversy.
RECOMMENDED: Government shutdown quiz
Already much of Washington and Wall Street has become dangerously blasé about the current shutdown. Oh, a few days or a week—no big deal. If it goes longer than that, they insist, then we’ll worry. ( Continue… )
Enrollment in the new health care exchanges begins today and the government is partially shut down in protest—never mind that Obamacare funding is largely immune to the shutdown.
The Republicans in the House appear to be getting most of the blame for the shutdown because they insist that continued government funding be tied to at least a temporary delay in the implementation of the President’s healthcare law, a nonstarter in the Democratic controlled Senate and the White House.
I wondered how the debate might be different if 2008 had produced a President Romney rather than Obama. Candidate Romney would have campaigned on the success of the Massachusetts health reform, arguably his greatest accomplishment as governor. The system of subsidies, mandates, and a regulated health insurance marketplace were the model for the Affordable Care Act.
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If we had Romneycare, the White House and Republicans would be trumpeting the remarkable success of the free (but regulated) market in providing a wide range of choices of insurance plans in most markets and pushing prices down. That is what choice and competition do! (And, exactly what seems to be happeningnow under Obamacare.) ( Continue… )
House GOP likely to include tax reform proposal in fight for a debt limit bill -- just delaying tough budget choices?
House Republicans reportedly are considering several ways to add a framework for tax reform to legislation needed to increase the federal government’s borrowing authority. Could such a rider increase the chances of reform happening in the near future? Sadly, no. Indeed, it is likely to bury a tax code rewrite even more deeply in Washington’s partisan muck.
The GOP leadership remains unsure about what this amendment would look like, to say nothing of what they’d finally accept once the bill works its way through the legislative meat grinder. But it seems pretty clear that adding tax reform to their debt limit wish list is little more than a talking point. And real reform would remain as elusive as ever, if not more so.
RECOMMENDED: Government shutdown 101: 12 ways it could affect you
Keep in mind that the House GOP is not going to include an actual tax reform plan in its version of the debt bill. They are, in fact, far from agreeing among themselves on what such a proposal would look like. But they could try to tie an outline of their tax reform goals, and perhaps a timetable for reform, to a debt limit extension. ( Continue… )
At an AEI panel discussion earlier this week, Senator Mike Lee (R-Utah) unveiled the Family Fairness and Opportunity Tax Reform Act. The centerpiece is an additional $2,500 tax credit for all children under age 17. The plan retains the $1,000 child tax credit under current law. Unlike the current credit, the new credit would not phase out at higher income levels.
Lee’s idea is straightforward—cut taxes for families with children and raise them for households with high itemized deductions.
He’d eliminate the standard deduction and personal exemption (except for dependents under 17) and replace them with a nonrefundable $2,000 per person credit. He’d also repeal the Alternative Minimum Tax and end the taxes associated with the 2010 Affordable Care Act (ACA).
He would also eliminate all but two itemized deductions, including those for state and local taxes. He’d keep the mortgage interest deduction (capped at $300,000 of debt) and the deduction for charitable giving—and make those available to all taxpayers. ( Continue… )
Today I had the chance to testify before the Joint Economic Committee about a perennial challenge, the looming debt limit. Here are my opening remarks. You can find my full testimony here.
I’d like to make six points about the debt limit today.
First, Congress must increase the debt limit.
Failure to do so will result in severe economic harm. Treasury would have to delay billions, then tens of billions, then hundreds of billions of dollars of payments. Through no fault of their own, federal employees, contractors, program beneficiaries, and state and local governments would find themselves suddenly short of expected cash, creating a ripple effect through the economy. A prolonged delay would be a powerful “anti-stimulus” that could easily push our economy back into recession.
In addition, there’s a risk that we might default on the federal debt. I expect that Treasury will do everything it can to make debt-service payments on time, but there is a risk that it won’t succeed. Indeed, we have precedent for this. In 1979, Treasury accidentally defaulted on a small sliver of debt in the wake of a debt limit showdown. That default was narrow in scope, but financial markets reacted badly, and interest rates spiked. If a debt limit impasse forced Treasury to default today, the results would be more severe. Interest rates would spike, credit would tighten, financial institutions would scramble for cash, and savers might desert money market funds. Anyone who remembers the financial crisis should shudder at the prospect of reliving such disruptions. ( Continue… )
While relatively few low-income people pay federal income tax, a large and growing share owe Social Security and Medicare payroll taxes, according to new estimates by the Tax Policy Center. As a result, while about 43 percent of all households will pay no federal income tax this year, only 14 percent will pay neither income nor payroll tax.
Once household income reaches $100,000, just about everyone pays both. But the story is more complex for those at the lower end of the economic food chain. Despite the oversimplified and inaccurate claims of some commentators, most low- and moderate-income households do pay Social Security and Medicare taxes, and the vast majority pay more in payroll tax than in income tax.
Nearly 63 percent of households in the lowest 20 percent of income (those making less than about $23,500) will pay some Medicare and Social Security taxes in 2013.
Many of those who don’t are the low-income elderly. Because they do not work, they pay no payroll taxes. And because their incomes are so low—often only Social Security benefits—they pay no income tax. ( Continue… )
A fascinating story in last Friday’s Wall Street Journal reports what I suppose was an inevitable trend: With the estate tax exemption now up to $5.25 million ($10.5 million for couples) estate tax lawyers are running out of work. So, writes the Journal’s Arden Dale, they are turning to income tax planning for high-net worth clients.
The Tax Policy Center estimates that this year only 3,780 estates will have assets exceeding $5 million and barely 2,000 of those will have $10 million or more. Since it is likely that most people with estates of this size have already done their tax planning, there is just not going to be a lot of new business out there.
RECOMMENDED: Can you manage your money? A personal finance quiz.
Of course, some states have lower thresholds that will keep estate tax attorneys busy. And the wealthy have reasons other than than pure tax savings to do estate planning. But still, what’s a lawyer to do? Some are even urging clients to unwind their trusts. ( Continue… )
Most of the 43 percent of Americans who the Tax Policy Center projects will pay no federal income tax this year make very little money. Some are middle-income households that qualify for enough tax preferences to zero out their tax bills. But more than 70,000 households with income over $200,000 will pay no federal income tax in 2013. How will they do that?
Some have very high medical expenses but the two biggest reasons are linked to their investments: foreign tax credits and tax-exempt bonds.
TPC’s hit video explains why the 43 percent pay no federal income tax. But for a closer look at why high-income households pay no income tax, it helps to turn to the IRS’s Statistics of Income (SOI) division.