Possible results of the "gang of six" proposal?

[bpwallace49]

..How Much Would The Gang Of Six Raise Your Taxes?

 

By Janet Novack | Forbes – Wed, Jul 20, 2011

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How much would that new bipartisan Senate “Gang of Six” plan to cut the deficit by $3.7 trillion over a decade raise taxes? And how about your own tax bill?

 

Those seem like straightforward questions and pretty important ones, considering the praise the plan has garnered from President Obama as well as outside budget hawks like billionaire Blackstone Group co-founder Peter Peterson. But the answers are muddied by politics, arcane Washington budgeting conventions and the decisions the plan leaves to a future fast track “tax reform” by Congress.

 

How’s this for confusing? Senate Budget Committee Chairman Kent Conrad (D-N.D.), a Gang of Six member, told reporters that the plan would raise $1.2 trillion in new revenues over a decade. Yet the Gang also distributed an executive summary asserting that if the Congressional Budget Office were to score the plan, it would find it has “net tax relief of $1.5 trillion”. In other words, according to this summary, it would actually cut the nation’s collective tax bill.

 

So which is it?

The answer is that the plan will raise $1.5 trillion less than the CBO baseline projection ---a projection that includes only tax law currently on the books and not any popular expectations for what the law might be. In this CBO baseline, all the Bush tax cuts, including those for the middle class, expire at the end of 2012, when the two-year tax cut extension President Obama negotiated with Republicans last December ends. Also in this baseline, the alternative minimum tax “fix”, which Congress passes every year or two to protect tens of millions of middle class Americans from the AMT, expires as scheduled at the end of 2011. As economist Leonard Burman puts it, the CBO baseline assumes “the AMT engulfs the middle class in a web of higher taxes and mind-numbing complexity”.

 

But the CBO also has an “alternative fiscal scenario” which it says includes the continuation of certain policies “that people have grown accustomed to—because those policies are in place now or were in place until recently.” That alternative includes the AMT fix and most of the Bush tax cuts, but not tax cuts for families earning more than $250,000 which Obama and many Democrats want to end. In this alternative scenario, the 2009 estate tax law, with a $3.5 million exemption and 45% rate is assumed, as opposed to the $5 million exemption and 35% rate in the 2010 Obama-Republican deal. (You can find more on scenarios in the CBO’s June 2011 Long-Term Budget Outlook here.)

 

The alternative scenario is the one President Obama’s bipartisan deficit commission used in its final report last December, which called for raising $800 billion over a decade by reforming the tax code----lowering rates but cutting or limiting a slew of credits and deductions (tax expenditures, in budget speak).

 

Similarly, the Gang of Six wants to use a loophole-closing, rate-lowering reform to raise $1 trillion over a decade for deficit reduction. (The Gang also called for raising $133 billion extra for highway spending over 10 years, without touching the gas tax. So it seems that money too might come from the income tax overhaul.) While the Gang left the heavy lifting of tax reform to the Senate Finance Committee, it suggested that the top individual and corporate tax rates be reduced to 23% to 29%, down from the current 35%. (Conrad's estimate that the plan would raise $1.2 trillion is apparently based on the CBO alternative, which it calls a "plausible" baseline.)

 

But before the Gang of Six plan can go anywhere, there’s yet another crucial baseline to consider-- what might be called the Grover Norquist line-in-the-sand baseline. According to Americans For Tax Reform President Norquist, the creator of a Taxpayer Protection Pledge that has been signed by all but six House Republicans, any Congressional action (or in some cases, inaction) that raises net taxes (other than through economic growth) is a tax hike and violates the pledge. So Norquist's baseline includes the extension of all the Bush tax cuts, including for the rich, as well as the $5 million estate exemption. Moreover, in Norquist’s world view, even the elimination of business subsidies delivered through the tax code---which Gang of Six member Sen. Tom Coburn (R-OK) derided Monday as “socialism and corporate welfare” ---is a verboten tax hike, unless it’s offset by an equal tax cut. Be assured that once ATR has analyzed the Gang's plan, it will judge the proposed tax hikes to be far in excess of $1.2 trillion. (Add: The Tax Policy Center's Donald Marron notes here that relative to the taxes people are paying now, the Gang of Six plan is roughly a $2 trillion increase.)

 

As for what impact the Gang's plan would have on your own personal tax bill, that depends not only on details of any tax reform (details the Gang left to others), but also on how much you use various tax breaks and the baseline you pick. For example, Obama’s deficit commission offered an “illustrative” reform that would reduce the top tax rate to 28%, but eliminate most current tax breaks, including the current deduction for interest paid on up to $1.1 million of primary home and second home mortgage debt. Instead, each family would be allowed a 12% credit against interest paid on a primary mortgage of up to only $500,000. That means higher income folks with big mortgages and vacation homes would get hit hard.

 

Then there’s that wonky, but politically charged baseline question again. The Tax Policy Center estimated that the debt commission's illustrative plan, when compared to the CBO baseline---the one which assumes the Bush tax cuts are allowed to expire---would mean that all but the richest 1% would pay less of their income in tax and the richest 1% would pay just 1.4% more. Yet if one assumes the Bush tax cuts, including those for the rich, continue--what I've called the Grover Norquist baseline---than middle income folks would end up paying about 1% more of their income in federal tax; the top 20% would pay 3% more; and the richest 1% would have to fork over 5.5% more of their income to Uncle Sam, the Tax Policy Center calculated. The 400 highest-income Americans, who paid an effective tax rate of just 18.1% in 2008, would face an even bigger tax hike. That's because the debt commission's illustrative reform eliminated the special top 15% rate for long term capital gains--a break which currently enables hedge fund managers and the uberrich to pay lower effective tax rates than high earning salaried folks.

 

[SayItAintSoJoe]

IMHO

 

The "Gang of Six" proposal will never become law so it doesn't really matter.

 

The "Cut, Cap, and Balance" bill will never become law so it doesn't really matter.

 

I predict congress along w/ the Pres. will not come to an agreement on how to raise the debt ceiling before 8/2. I hope I'm wrong.

[bpwallace49]

On an aside . . . does anyone know how much debt is held be foreign companies vs the federal gubmnet?

 

For instance . . how much is held by the Fed vs other countries vs social security IOUs, etc?

[muck]

The capital gains tax rate is hardly a "special upper income bracket for the uber rich".

 

I'd call it the friction of asset allocation more than anything else.

 

If you are 40% invested in US Large caps, 30% in US Corporate bonds and 30% in Non-US Equities, and you want to sell your best performing class and reallocate to your worst performing class so that you end up with 30% US Large Caps, 35% US Corporate Bonds, 25% Non-US Equities, 5% Natural Resources (Gold, Silver, timber, oil, gas, etc.) and 5% Non-US Bonds ... then the gains you have on your appreciated assets is the cost you incur to reallocate your assets.

 

Just because a billionaire buys a business after having sold another business doesn't make the facts any different ... they just add zeroes to the equasion.

 

Capital gain taxes are the friction of asset allocation.

 

Raise them, and it inhibits new capital formation (i.e., I don't want to sell "X" so that I can buy "Y" because I'd have to pay ____% in capital gains on my hugely appreciated property; I'll just stay where I'm at instead) ... however ... dropping them suddenly (as we saw a couple of years ago w/ real estate, etc.) leads to asset bubbles due to the pent-up desire to sell long-held assets and reallocate.

[billay]

On an aside . . . does anyone know how much debt is held be foreign companies vs the federal gubmnet?

 

For instance . . how much is held by the Fed vs other countries vs social security IOUs, etc?

Off the top of my head, based on something i read the other day, China, as an example as one of our largest foreign creditors holds somewhere in the neighborhood of 1.4 trillion in US debt (they, of course, were not the only one). I seem to recall that the US owed itself close to 4 trillion.

[bpwallace49]

Off the top of my head, based on something i read the other day, China, as an example as one of our largest foreign creditors holds somewhere in the neighborhood of 1.4 trillion in US debt (they, of course, were not the only one). I seem to recall that the US owed itself close to 4 trillion.

 

So if the majority debtholder is the US . . . arent we just further frackin ourselves by defaulting and paying ourselves back?

[billay]

The short term problem is that we borrow 40 cents of every dollar we spend, so if our spending is suddenly going to be cut by 40%, we will have a serious cash flow problem. However, I seriously doubt that we will default.

[Azazello1313]

kind of an amusing take I saw this morning...

 

This morning when I woke up up the first thing I heard was that the Gang of Six had agreed to massive spending cuts, abolition of the hated AMT, and reduction of the top rate to between 23-29%. Oh, and a slash in the corporate top rate too. I thought I was dreaming. Surely this is too good to be true! And then I heard that Obama endorsed the plan. Now I knew I was dreaming. Then I heard that it wouldn’t pass because of GOP opposition in the House. Ouch, I was brutally shaken out of my reverie. If only life could be like our dreams. Unfortunately, there’s always the House GOP to keep it real.

[yo mama]

On an aside . . . does anyone know how much debt is held be foreign companies vs the federal gubmnet?

 

For instance . . how much is held by the Fed vs other countries vs social security IOUs, etc?

only about 1/3 of our national debt is held by foreigners. Contrary to popular belief, China does not own this country - it is merely the largest foreign minority shareholder.