Senate backs legislation to raise taxes on wealthy Americans

Scranton's favorite son Joe Biden emerges from talks on the fiscal cliff with a smile.

Πηγή: Digital Journal
By Yukio Strachan
Jan 1 2013

Nearly two hours after the midnight deadline to keep the U.S. from diving off the so called "fiscal cliff," the Senate overwhelmingly approved an agreement to raise taxes on the wealthy.

The deal, worked out in heated negotiations since Sunday afternoon between Vice President Joseph R. Biden Jr. and the Republican Senate leader, Mitch McConnell, was approved in an 89-8 vote.
“This shouldn’t be the model for how to do things around here,” McConnell, R-Kentucky, said just after 1:30 a.m. “But I think we can say we’ve done some good for the country.”

Biden, after a late New Year’s Eve meeting with leery Senate Democrats to sell the accord, said: “You surely shouldn’t predict how the House is going to vote. But I feel very, very good.”

The White House-backed legislation would prevent middle-class taxes from rising, and tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, CNN reported. In addition, tax deductions and credits would start phasing out on incomes as low as $250,000.

Monday’s deal also blocks spending cuts for two months until a new agreement can be reached; extends unemployment benefits for the long-term jobless; prevents a 27 percent cut in fees for doctors who treat Medicare patients; prevents a spike in milk prices; and also prevents a $900 pay raise for members of Congress from taking effect in March.

Here are a few in detail:

Long-term unemployment benefits: As CBS News notes, the U.S. tumbled into recession following the 2008 financial crisis, Congress enacted a temporary supplement to state-based unemployment insurance programs, which usually pay benefits for 6 months. Under the new fiscal deal, that measure will be extended for one year, preserving benefits for 2 million Americans who were at risk for losing benefits at year's end.

Tax credits for low- to middle-income earners: The bill includes a host of tax rate extensions. For example, the Child Tax Credit, Earned Income Tax Credit, and Obama Opportunity Tax Credit (college tuition credits) will all be extended for five more years, all which were part of the 2009 economic stimulus package.

Both Democratic and Republican senators concluded it was better to accept a deal despite their objections.
Sen. Kay Bailey Hutchison (R-Texas) told the Hill: "It's not something that any of us would say, 'Oh, I love it.' I don't love it, but I think it is a very good job of negotiating where there are some wins and some losses and it's about even."

Montana Democratic Sen. John Tester summed it up this way: Although far from perfect, it provides the tax relief Americans deserve while "preventing irresponsible cuts that would hurt our kids and seniors,” the Daily Caller reported.

Overall, it's a clear victory for President Obama, who ran for re-election promising voters that he would raise taxes on the wealthy, making them pair their fair share.

As the Hill notes, the passage of the bill is a significant victory for Biden, who might run for president in 2016, and McConnell, who is up for reelection next year.

“While neither Democrats nor Republicans got everything they wanted," President Barack Obama said in a statement after the vote. "This agreement is the right thing to do for our country and the House should pass it without delay.”

House vote expected before Wednesday

Senate approval sends the bill to the House, where Speaker John Boehner (R-Ohio) said the House will review the Senate bill.

“The House will honor its commitment to consider the Senate agreement if it is passed,” Boehner said. “Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members — and the American people — have been able to review the legislation.”

The House is due back at noon Eastern time for a rare New Year’s Day session. A House vote is expected before Wednesday, the Associated Press reported. It remains unclear whether the bill will have the votes to pass in the Republican-controlled body.

Quick passage before the markets reopen on Wednesday would likely negate any economic damage from Tuesday’s breach of the so-called “fiscal cliff" which happened when senators missed a midnight deadline for action. That means the vote would largely spare the nation’s economy from the one-two punch of large tax increases and across-the-board military and domestic spending cuts in the New Year, the New York Times writes.

The 89-8 vote puts pressure on the GOP-led House to approve the legislation. Still, it remains to be seen if most House Republicans will back a bill that lacks the deep spending cuts.

Read the bill (pdf)

Soak or swim: How to raise the highest rates without doing too much damage

Πηγή: The Economist
Jan 21 2012

DOES raising taxes on those who are doing well economically stifle growth and slow down the recovery? That depends on how rich people behave when their taxes rise. Do they work less when they are allowed to keep a smaller chunk of their income? Do they move their money offshore? Do they take a larger share of their earnings in forms that are more lightly taxed? Economists have looked at the effects of many past changes in tax rates to try to answer such questions.

Martin Feldstein, a Harvard economist, found that the taxable income of the rich adjusted dollar-for-dollar with tax rates when America cut its highest tax rate from 50% to 28% in 1986, so that tax revenues stayed the same. This would suggest that raising top tax rates is likely to produce little extra revenue, while distorting economic behaviour further. But others have found that this adjustment in taxable income is driven largely by people altering when and how they take their income in order to minimise their tax burden. For instance, there was a big fall in taxable income after tax rates rose in 1993; but most of this seems to have come from a few rich people hurrying to cash in their stock options before taxes rose.

Thomas Piketty of the Paris School of Economics, Emmanuel Saez of the University of California, Berkeley, and Stefanie Stantcheva of MIT argue in a new paper that this is why few studies have been able to show any significant long-term effect from raising top tax rates. But such avoidance, they say, is merely a symptom of a poorly designed tax system. It is silly to have a high tax rate while simultaneously giving people many ways to avoid paying it. So the first task of tax reformers must be to minimise such opportunities by having a broader tax base, better enforcement and similar tax rates for different kinds of income.

That is relatively uncontroversial. But their other finding is likely to raise a few eyebrows. They reckon that if the tax system were reformed to make evasion impossible, the top tax rate might be able to rise to as much as 83%—that is, to levels last seen in the 1960s—without hurting the economy. This is because people do not seem greatly to adjust how much they work when tax rates change. Higher top rates may also discourage big earners from spending too much of their time trying to bargain for a larger share of the overall pie.

Now all that remains is to remove the loopholes. On past experience, America’s rich need not lose sleep over that.

Bush Tax Widened US Wealth Gap, Says Study

Πηγή: LowTax
Jan 18 2012

A recently-released report by the Congressional Research Service (CRS), on the changes in the distribution of income among individual filers of tax returns between 1996 and 2006, has concluded that the tax cuts that were first enacted under the presidency of George W. Bush have contributed to a widening of the United States wealth gap.

The CRS report examines changes in income inequality among US tax filers between 1996 and 2006. In particular, it points out that Congress will soon need to address issues affecting the distribution of taxpayers’ income in the US.

For example, the Administration has stated that one of its principles for tax reform is to observe the “Buffett rule” that “no household making over USD1m annually should pay a smaller share of its income in taxes than middle-class families pay,” while Congress will need, later this year, to debate the scheduled expiration (at the end of 2012) of the 2001 and 2003 Bush tax cuts.

The CRS found that inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). However, the average increase obscures a great deal of variation; in that “the poorest 20% of tax filers experienced a 6% reduction in income, while the top 0.1% of tax filers saw their income almost double.”

In addition, the CRS also found that “tax filers in the middle of the income distribution experienced about a 10% increase in income, and the proportion of income from capital increased for the top 0.1% from 64% to 70%.”

It has been ascertained that capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996, and that changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality.

However, total taxes (individual income tax, payroll tax and the corporate income tax) also contributed to the increase in income inequality between 1996 and 2006. Taxes reduced income inequality by 5% in 1996, but by less than 4% in 2006. Taxes were therefore more progressive and had a greater equalizing effect in 1996 than in 2006.

The major tax change between 1996 and 2006 was enactment of the Bush tax cuts, which reduced taxes especially for higher-income tax filers. Those tax cuts involved reduced tax rates, the introduction of the 10% tax bracket (which reduced taxes for all taxpayers), and reduced tax rates on long-term capital gains and qualified dividends.

Furthermore, in 1996, long-term capital gains were taxed at 28% (15% for lower-income taxpayers) and all dividends were taxed as ordinary income. By 2006, long-term capital gains and qualified dividends were taxed at 15% (5% for lower-income taxpayers).

Does the U.S. Tax its Billionaires Less Than Other Rich Countries?

Πηγή: Foreign Policy
BY JOSHUA E. KEATING

Sep. 20 2011

U.S. President Barack Obama announced his new deficit reduction plan this week, including the so-called "Buffett Rule," which would allow the Bush-era income tax cuts to expire and close corporate tax loopholes. "Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it," Obama said this week, echoing comments to the same effect made by the Berkshire-Hathaway CEO billionaire in recent weeks. It's difficult to say whether that statement is actually true or not, but does America coddle its richest citizens more than other countries?

By European standards, yes. Compared to the developing world, not really. The top U.S. marginal tax rate -- 35 percent -- is low by the standards of developed countries. It's about 51 percent in Britain, 47.5 percent in Germany, and 40 percent in France. Until recently, Denmark's highest tax rate was a whopping 63 percent, but that's been recently cut down to about 51 percent -- good news for billionaires like Lego tycoon Kjeld Kirk Kristiansen. Not all rich countries tax heavily however. At 29 percent, Canada's top rate is actually lower than the United States.

But what about the dynamic growing superpowers of the developing world? Things are a little easier for the Learjet set there. Brazil's top income tax rate is 27.5 percent and India's is 30.9 percent. China's is a relatively high 45 percent; however tax evasion is pervasive, so it's unlikely that most of the country's 115 billionaires actually pay that much.

But income is only part of the story. The reason why Buffett's taxes are allegedly lower than his secretary, Debbie Bosanek, is that the vast majority of his income comes from investments, which in the United States is taxed at a rate of only 15 percent. The fact that making investments is, in fact, what Buffett does for a living is irrelevant.

Other countries are not quite so generous. In Germany, for instance, dividends are taxed at a rate of 25 percent and sometimes as high as 60 percent. Moreover, in many European countries, investment professionals have to count dividends as labor income, meaning that they are taxed at the normal income tax rate. That's a pretty big distinction for someone like Buffett, who takes home a relatively modest annual salary of $100,000 but can pocket as much as $42.6 million in dividends in a given year.

The United States wasn't always a billionaire's paradise, though. The top income tax rate was over 90 percent throughout the 1950s and early '60s. And from 1982 to 1985, under GOP favorite President Ronald Reagan, America's richest people were taxed on 50 percent of their income -- a figure even Scandinavia could love.

These days, the most billionaire-friendly places may be the post-Communist states in Eastern Europe, which have increasingly fallen in love with flat taxes. Steve Forbes's dream is now a reality in countries including the Czech Republic, Slovakia, Georgia, Bulgaria, Estonia, and more. Hungary introduced a remarkably low 16 percent flat tax last year, but this week, the debt-addled government announced new taxes on high-income citizens, overturning the rule. Sorry,Sandor Demjan.

The United States is also an outlier in its lack of a Value Added Tax (VAT), a tax on all commercial activities involved in the production and distribution of a product, which is ultimately paid by the consumer. VAT is used throughout the EU and in many other countries, including India, Brazil, and China. Several prominent policymakers including House Democratic Leader Nancy Pelosi and White House economic advisor Paul Volcker have suggested instituting a VAT as a means of addressing the U.S. deficit, but unsurprisingly, the idea of a new tax has gained little traction in Washington.