http://news.yahoo.com/s/ap/20101127/ap_on_re_us/us_economy_tax_cuts
By JEANNINE AVERSA, AP Economics Writer Jeannine Aversa – Sat Nov 27, 4:21 pm ET
WASHINGTON –
On this, economists agree: Extending tax cuts passed under President George W. Bush for low- and middle-income people would strengthen the weak economy.
The question is what to do about the highest-paid 3 percent of taxpayers. Should Congress let their tax cuts expire at year's end as scheduled? Extend them for only a while? Or make them permanent?
It isn't just a debate over how much money high-income Americans should get to keep. It's about how much their tax cuts might aid the economy. And how much they'll affect the budget deficit years from now.
But first, consider what would happen next year if Congress let the tax cuts for everyone expire as scheduled. According to Moody's Analytics, the deficit would drop to $732 billion. That's well below the $1.3 trillion deficit for the budget year that ended Sept. 30.
At the same time, the economy would suffer, Moody's says: Growth would tail off to just 0.9 percent next year. That's scarcely more than a recessionary pace. And unemployment would average 10.7 percent next year.
That's because higher taxes would leave people with less money to spend. Businesses would be less inclined to hire. Economic growth would slide. Yet if Democrats and Republicans can't reach a deal during the post-election lame-duck session that began this month, taxes will rise across the board in January.
Republicans triumphant in the midterm elections insist that everyone, regardless of income, should continue to enjoy the tax cuts approved during George W. Bush's presidency.
President Barack Obama wants to extend the tax cuts for individuals with taxable incomes below $200,000 a year and couples with incomes below $250,000. Taxable income is a taxpayer's total income minus allowable deductions and exemptions.
Obama has long argued that income above those levels should be taxed at the higher rates that existed before 2001. Yet since his party suffered major losses in the elections, Obama has signaled a willingness to compromise. The White House has indicated he is open to a one- or two-year extension of the tax cuts but opposes a permanent extension for the highest earners.
Here's how analysts think each of the three leading options would affect the economy next year:
---
OPTION ONE: Let the tax rates for the highest earners rise back to what they were before 2001, when the first round of Bush tax cuts was passed. But extend them permanently for everyone else. This is what Obama favors.
Moody's Analytics says that under this scenario, the economy would grow 2.6 percent in 2011. That's better than the scant 0.9 percent growth envisioned if everyone's tax cuts expired.
Economists note that low- and middle-income people tend to spend more of their take-home pay than the highest-earners do. That's especially true in a tough economy.
Still, unemployment would average 10 percent next year, up from the 9.7 percent estimated for this year. The jobless rate would tick up as growth weakened slightly next year.
This reflects the Republican argument that a tax increase for high-income taxpayers would hurt some small-business owners, making them less inclined to hire.
The budget deficit would fall to $904 billion in 2011, from $1.3 trillion in the just-ended budget year. That would be due to the additional taxes paid by higher-income Americans.
___
OPTION TWO: Extend the tax cuts for one or two years for the highest earners and permanently for everyone else.
Moody's Analytics estimates this scenario would help the economy more than the first approach. The economy would grow 2.95 percent next year — a 0.4 percentage point improvement over Option One.
Unemployment would average 9.9 percent next year. That would be slightly worse than the 9.7 percent average rate estimated for this year. Stronger growth wouldn't be enough to prevent the unemployment rate from rising as more jobseekers, perhaps feeling better about their prospects, resume their search for work.
Even though no one's taxes would rise in 2011, the budget deficit would drop to $943 billion from $1.3 trillion this year. That's because tax revenue would rise as people spent more and stimulated more economic activity.
The reasoning is that Option Two would deliver a psychological boost: Americans, regardless of income, would know their income taxes wouldn't rise anytime soon. High earners would have more money to spend than under Option One.
Obama and Republicans have signaled their openness to extending the tax cuts for everyone temporarily, perhaps for one or two years. That would force Obama to face the issue again in 2012, when he'll likely seek re-election. Senate Minority Leader Mitch McConnell, R-Ky., says he'll fight to make sure no one, regardless of income, would face a tax increase once any extended tax cuts expire.
Supporters say the economy is too fragile now to boost taxes even on the highest earners and risk causing them to spend less. At the same time, a temporary extension wouldn't necessarily swell the budget deficit over the long run.
___
OPTION THREE: Make the tax cuts permanent for everyone. This is the plan Republicans favor.
By Moody's calculations, the impact on unemployment, growth and the deficit in 2011 would be the same as in Option Two.
Still, renewing the tax cuts across the board would swell the debt over the next decade by nearly $4 trillion, the Congressional Budget Office says. That's even after accounting for the extra revenue that would flow to the government as permanently lower taxes boosted spending and growth.
Besides, many economists say high-income Americans tend to squirrel away most of the tax money they save. A report from the Congressional Budget Office agreed.
Mark Zandi, chief economist at Moody's Analytics, calculated that when higher earners get an extra dollar of after-tax income, they spend just 40 cents of it. Middle-income Americans spend 66 cents. The poor spend almost all of it. Even so, as higher earners chip in and spend, the economy benefits.
Allen Sinai, chief economist at Decision Economics, fears that letting the tax cuts for high-income Americans expire could reduce the flow of money into private equity firms, venture capital and other investments that "grease the wheels of entrepreneurship in the U.S. economy."
Under Sinai's estimates, extending the tax cuts for all would provide the biggest boost to spending and growth. People and businesses would know they could count on the money in the future.
Yet even if the tax cuts were extended for everyone, unemployment would still be expected to rise next year. Economic growth still wouldn't be robust enough to create enough jobs.
Showing posts with label federal budget. Show all posts
Showing posts with label federal budget. Show all posts
Saturday, November 27, 2010
Wednesday, November 17, 2010
New deficit plan would cut $6 trillion
http://money.cnn.com/2010/11/17/news/economy/debt_commission_rivlin_domenici/index.htm
By Jeanne Sahadi, senior writer, November 17, 2010: 8:39 AM ET
NEW YORK (CNNMoney.com) -- The country got a little shock therapy last week when the co-chairmen of President Obama's debt commission offered their recommendations for curbing U.S. debt. One of their goals: reduce deficits by $4 trillion over the next decade.
On Wednesday, a leading group of economists, budget experts and former government officials is doing them one better -- offering a plan that would save $6 trillion by 2020.
The Bipartisan Policy Center's Debt Reduction Task Force is led by Republican Pete Domenici, a former senator from New Mexico, and Democrat Alice Rivlin, the founding director of the Congressional Budget Office and a member of the president's debt commission.
In broad strokes, the task force's recommendations echo the proposals from Erskine Bowles and Alan Simpson.
But the panel's report also diverges in some very significant ways from the Bowles-Simpson plan. Most notably it calls for a one-year $650 billion payroll tax holiday as well as a national sales tax that could raise trillions in revenue over 30 years. And it would not formally raise the retirement age for Social Security.
Overall, the Domenici-Rivlin plan would stabilize the amount of accumulated U.S. debt below 60% of GDP by 2020. That's roughly where debt as a percentage of the economy is today.
But barring changes to current policies, the debt is slated to top 87% by 2020 and approach 200% by 2035, according to the Congressional Budget Office.
Between 2012 and 2040, the Domenici-Rivlin plan would generate a staggering $84 trillion in debt-reduction savings, with roughly equal amounts generated from the spending and tax sides of the ledger and the rest coming from savings on interest payments.
Spending: Freezes, cuts
Freeze non-defense defense spending: The Domenici-Rivlin plan would impose a five-year freeze on defense spending, after which the growth rate would be capped at the rate the economy grows.
In addition, the plan recommends that the savings identified by Defense Secretary Robert Gates be used to reduce the deficit rather than be reinvested in defense. Other suggestions include reforming military health care and prioritizing defense investment.
Freeze domestic spending: The plan would impose a four-year freeze, after which the growth rate would be capped at GDP growth. Among the recommended changes to accommodate the freeze: terminate ineffective programs and set priorities for government programs.
Reduce farm program spending: Among the recommended changes, farm payments to producers making more than $250,000 would be eliminated. (10 ways to cut Uncle Sam's budget)
Taxes:New break, new sales tax
Simpler, reformed tax system: The plan would reduce the current six income tax rates to just two (15% and 27%). It would reduce the corporate tax rate to 27% from 35% today.
It would also simplify the federal tax system so much that nearly 90 million households -- or roughly half of all tax filers -- wouldn't have to file a federal tax return.
The panel would also eliminate most tax credits and deductions, which currently cost federal coffers roughly $1 trillion a year.
But its plan preserves some key tax breaks, such as those for mortgage interest and charitable contributions, which would be converted to tax credits. The conversion will benefit more taxpayers but would represent a smaller tax break for many who currently take the deductions.
New sales tax: One proposal from the panel sure to draw fire is the "Debt Reduction Sales Tax" -- which is a form of a value-added tax or VAT.
The tax would be phased in, starting at 3% in 2012 and increasing to 6.5% in 2013. It would raise revenue to help reduce deficits. One aim of delaying its start is to spur economic recovery by encouraging people to buy more to avoid the tax coming in 2012.
For simplicity's sake, the tax would be broad and exempt very few purchases. But consumers -- particularly low-income households -- would get tax rebates to compensate them for taxes they pay on essential items like food and medicine.
The sales tax is estimated to raise a net of $150 billion in new revenue in 2015 after accounting for the rebates. From 2012 to 2040, it would raise an estimated $9.3 trillion in net revenue.
Payroll tax holiday: To help create jobs, the panel believes a year-long payroll tax holiday for employers and their workers in 2011 "will immediately add money to employee paychecks while incentivizing companies to hire new workers."
The panel estimates this $650 billion tax cut could create between 2.5 million and 7 million jobs.
The trust funds of Social Security and Medicare, which are normally supported by the payroll tax, would instead be reimbursed from general revenues in 2011. In reality that means the government would have to borrow the money to make the trust funds whole.
Social Security: Solvent for the long run
Payroll tax revenue increase: The Rivlin-Domenici proposal would over nearly 40 years raise the amount of wages subject to payroll taxes (currently $106,800). In their plan, 90 percent of all wages earned in the country would eventually be subject to the payroll tax.
Incentive to work longer: Technically the Rivlin-Domenici panel doesn't raise the official early or full retirement ages for Social Security benefits. But as time goes on, benefits would be reduced for those who retire at 62 to account for increasing longevity.
Include more workers in the system: Newly hired state and local government workers would be required to pay into the system by 2020.
Change cost-of-living adjustments: Retiree benefits would still be adjusted for inflation, but the plan calls for a new formula that offers what some say is a more accurate reading of inflation. In any case, it's a less generous formula than the current one in use.
Adjust benefits for high- and low-income workers: The growth rate in benefits for the top 25% of beneficiaries would be slowed; while the plan would increase the minimum benefit for long-time lower-wage workers.
By Jeanne Sahadi, senior writer, November 17, 2010: 8:39 AM ET
NEW YORK (CNNMoney.com) -- The country got a little shock therapy last week when the co-chairmen of President Obama's debt commission offered their recommendations for curbing U.S. debt. One of their goals: reduce deficits by $4 trillion over the next decade.
On Wednesday, a leading group of economists, budget experts and former government officials is doing them one better -- offering a plan that would save $6 trillion by 2020.
The Bipartisan Policy Center's Debt Reduction Task Force is led by Republican Pete Domenici, a former senator from New Mexico, and Democrat Alice Rivlin, the founding director of the Congressional Budget Office and a member of the president's debt commission.
In broad strokes, the task force's recommendations echo the proposals from Erskine Bowles and Alan Simpson.
But the panel's report also diverges in some very significant ways from the Bowles-Simpson plan. Most notably it calls for a one-year $650 billion payroll tax holiday as well as a national sales tax that could raise trillions in revenue over 30 years. And it would not formally raise the retirement age for Social Security.
Overall, the Domenici-Rivlin plan would stabilize the amount of accumulated U.S. debt below 60% of GDP by 2020. That's roughly where debt as a percentage of the economy is today.
But barring changes to current policies, the debt is slated to top 87% by 2020 and approach 200% by 2035, according to the Congressional Budget Office.
Between 2012 and 2040, the Domenici-Rivlin plan would generate a staggering $84 trillion in debt-reduction savings, with roughly equal amounts generated from the spending and tax sides of the ledger and the rest coming from savings on interest payments.
Spending: Freezes, cuts
Freeze non-defense defense spending: The Domenici-Rivlin plan would impose a five-year freeze on defense spending, after which the growth rate would be capped at the rate the economy grows.
In addition, the plan recommends that the savings identified by Defense Secretary Robert Gates be used to reduce the deficit rather than be reinvested in defense. Other suggestions include reforming military health care and prioritizing defense investment.
Freeze domestic spending: The plan would impose a four-year freeze, after which the growth rate would be capped at GDP growth. Among the recommended changes to accommodate the freeze: terminate ineffective programs and set priorities for government programs.
Reduce farm program spending: Among the recommended changes, farm payments to producers making more than $250,000 would be eliminated. (10 ways to cut Uncle Sam's budget)
Taxes:New break, new sales tax
Simpler, reformed tax system: The plan would reduce the current six income tax rates to just two (15% and 27%). It would reduce the corporate tax rate to 27% from 35% today.
It would also simplify the federal tax system so much that nearly 90 million households -- or roughly half of all tax filers -- wouldn't have to file a federal tax return.
The panel would also eliminate most tax credits and deductions, which currently cost federal coffers roughly $1 trillion a year.
But its plan preserves some key tax breaks, such as those for mortgage interest and charitable contributions, which would be converted to tax credits. The conversion will benefit more taxpayers but would represent a smaller tax break for many who currently take the deductions.
New sales tax: One proposal from the panel sure to draw fire is the "Debt Reduction Sales Tax" -- which is a form of a value-added tax or VAT.
The tax would be phased in, starting at 3% in 2012 and increasing to 6.5% in 2013. It would raise revenue to help reduce deficits. One aim of delaying its start is to spur economic recovery by encouraging people to buy more to avoid the tax coming in 2012.
For simplicity's sake, the tax would be broad and exempt very few purchases. But consumers -- particularly low-income households -- would get tax rebates to compensate them for taxes they pay on essential items like food and medicine.
The sales tax is estimated to raise a net of $150 billion in new revenue in 2015 after accounting for the rebates. From 2012 to 2040, it would raise an estimated $9.3 trillion in net revenue.
Payroll tax holiday: To help create jobs, the panel believes a year-long payroll tax holiday for employers and their workers in 2011 "will immediately add money to employee paychecks while incentivizing companies to hire new workers."
The panel estimates this $650 billion tax cut could create between 2.5 million and 7 million jobs.
The trust funds of Social Security and Medicare, which are normally supported by the payroll tax, would instead be reimbursed from general revenues in 2011. In reality that means the government would have to borrow the money to make the trust funds whole.
Social Security: Solvent for the long run
Payroll tax revenue increase: The Rivlin-Domenici proposal would over nearly 40 years raise the amount of wages subject to payroll taxes (currently $106,800). In their plan, 90 percent of all wages earned in the country would eventually be subject to the payroll tax.
Incentive to work longer: Technically the Rivlin-Domenici panel doesn't raise the official early or full retirement ages for Social Security benefits. But as time goes on, benefits would be reduced for those who retire at 62 to account for increasing longevity.
Include more workers in the system: Newly hired state and local government workers would be required to pay into the system by 2020.
Change cost-of-living adjustments: Retiree benefits would still be adjusted for inflation, but the plan calls for a new formula that offers what some say is a more accurate reading of inflation. In any case, it's a less generous formula than the current one in use.
Adjust benefits for high- and low-income workers: The growth rate in benefits for the top 25% of beneficiaries would be slowed; while the plan would increase the minimum benefit for long-time lower-wage workers.
Wednesday, November 10, 2010
Report from bipartisn deficit reduction commission
Report from the Bipartisan leaders of President Barack Obama's deficit commission Read the entire article if you're interested in this topic. I have only reproduced a couple of excerpts below. Even with the historic tsunami on November 2nd, politicians still want to do business as usual. Sad.
http://news.yahoo.com/s/ap/20101111/ap_on_bi_ge/us_cutting_deficits
The plan would gradually increase the retirement age for full Social Security benefits — to 69 by 2075 — and current recipients would receive smaller-than-anticipated annual increases. Equally controversial, it would eliminate the current tax deduction that homeowners receive for the interest they pay on their mortgages.
The government reported separately Wednesday that the deficit for last month alone was $140.4 billion — and that was 20 percent lower than a year earlier. The red ink for all of the past fiscal year was $1.29 trillion, second highest on record, and this year is headed for the third straight total above $1 trillion.
Current deficits require the government to borrow 37 cents out of every dollar it spends.
Still, the plan was rejected as "simply unacceptable" by House Speaker Nancy Pelosi, D-Calif., a top Obama ally.
http://news.yahoo.com/s/ap/20101111/ap_on_bi_ge/us_cutting_deficits
The plan would gradually increase the retirement age for full Social Security benefits — to 69 by 2075 — and current recipients would receive smaller-than-anticipated annual increases. Equally controversial, it would eliminate the current tax deduction that homeowners receive for the interest they pay on their mortgages.
The government reported separately Wednesday that the deficit for last month alone was $140.4 billion — and that was 20 percent lower than a year earlier. The red ink for all of the past fiscal year was $1.29 trillion, second highest on record, and this year is headed for the third straight total above $1 trillion.
Current deficits require the government to borrow 37 cents out of every dollar it spends.
Still, the plan was rejected as "simply unacceptable" by House Speaker Nancy Pelosi, D-Calif., a top Obama ally.
Friday, May 14, 2010
Health plan will deepen federal budget deficit
Video on Federal taxes fall short of spending:
http://money.cnn.com/video/news/2010/04/13/n_iousa_federal_deficit_2010_1.4_trillion.cnnmoney/
Congressional Budget Office estimates predict the health care overhaul will likely cost about $115 billion more in discretionary spending over ten years than the original cost projections.
http://www.politico.com/news/stories/0510/37081.html
The Congressional Budget Office expects the federal agencies to spend $10 billion to $20 billion over 10 years on administrative costs to implement the overhaul. The CBO expects Congress to spend an additional $105 billion over 10 years to fund discretionary programs in the overhaul.
The CBO estimated in March that the gross cost of the overhaul would be $940 billion over 10 years. The net cost was estimated at $788 billion over 10 years. But the group cautioned that it couldn’t make an estimate of the discretionary costs without more time and information.
The figures represent estimates as to how Congress will decide to spend money. The CBO cautions that lawmakers could decide to spend less. They would still have to respect the administration’s nonsecurity discretionary spending freeze.
The Department of Health and Human Services is expected to need $5 billion to $10 billion to implement changes in Medicare, Medicaid, the Children’s Health Insurance Program and insurance industry reforms, according to CBO estimates.
The nonpartisan CBO expects the Internal Revenue Service to spend another $5 billion to $10 billion on implementing the rules regarding premiums and cost-sharing credits.
An administration official cautioned that Congress doesn't always spend all that it is authorized to and that lawmakers would have to make other cuts to make up for any new spending they approve to stay within the budget and avoid adding to the deficit.
"The Affordable Care Act will reduce the deficit by more than $100 billion in the first decade, and that will not change unless Congress acts to change it," said Kenneth Baer, an OMB spokesman. "If these authorizations are funded, they must be offset somewhere else in the discretionary budget. The president has called for a non-security discretionary spending freeze, and he will enforce that with his veto pen."
The legislation says that the agencies would receive the funding to implement the programs through the appropriations process.
“The law establishes a number of new programs and activities, as well as authorizing new funding for existing programs,” CBO director Douglas W. Elmendorf said in the letter. “By their nature, however, all such potential effects on discretionary spending are subject to future appropriation actions, which could result in greater or smaller costs than the sums authorized by the legislation.”
http://money.cnn.com/video/news/2010/04/13/n_iousa_federal_deficit_2010_1.4_trillion.cnnmoney/
Congressional Budget Office estimates predict the health care overhaul will likely cost about $115 billion more in discretionary spending over ten years than the original cost projections.
http://www.politico.com/news/stories/0510/37081.html
The Congressional Budget Office expects the federal agencies to spend $10 billion to $20 billion over 10 years on administrative costs to implement the overhaul. The CBO expects Congress to spend an additional $105 billion over 10 years to fund discretionary programs in the overhaul.
The CBO estimated in March that the gross cost of the overhaul would be $940 billion over 10 years. The net cost was estimated at $788 billion over 10 years. But the group cautioned that it couldn’t make an estimate of the discretionary costs without more time and information.
The figures represent estimates as to how Congress will decide to spend money. The CBO cautions that lawmakers could decide to spend less. They would still have to respect the administration’s nonsecurity discretionary spending freeze.
The Department of Health and Human Services is expected to need $5 billion to $10 billion to implement changes in Medicare, Medicaid, the Children’s Health Insurance Program and insurance industry reforms, according to CBO estimates.
The nonpartisan CBO expects the Internal Revenue Service to spend another $5 billion to $10 billion on implementing the rules regarding premiums and cost-sharing credits.
An administration official cautioned that Congress doesn't always spend all that it is authorized to and that lawmakers would have to make other cuts to make up for any new spending they approve to stay within the budget and avoid adding to the deficit.
"The Affordable Care Act will reduce the deficit by more than $100 billion in the first decade, and that will not change unless Congress acts to change it," said Kenneth Baer, an OMB spokesman. "If these authorizations are funded, they must be offset somewhere else in the discretionary budget. The president has called for a non-security discretionary spending freeze, and he will enforce that with his veto pen."
The legislation says that the agencies would receive the funding to implement the programs through the appropriations process.
“The law establishes a number of new programs and activities, as well as authorizing new funding for existing programs,” CBO director Douglas W. Elmendorf said in the letter. “By their nature, however, all such potential effects on discretionary spending are subject to future appropriation actions, which could result in greater or smaller costs than the sums authorized by the legislation.”
Sunday, March 7, 2010
CBO: $10 trillion jump in debt under Obama budget
Our debt to GDP ratio is around 85% and rising (see http://www.usgovernmentspending.com/federal_debt_chart.html), Congress recently raised the debt ceiling approching 100% of the country's GDP. Do we really want to follow Japan's foot step where the debt to GDP ratio is 200% and where the country's economy has been stagnant for 20 years?
http://money.cnn.com/2010/03/05/news/economy/cbo_obama_budget/index.htm
By Jeanne Sahadi, senior writerMarch 5, 2010: 6:13 PM ET
NEW YORK (CNNMoney.com) -- If President Obama's 2011 budget were put into effect as proposed, the U.S. federal government would add an estimated $9.8 trillion to the country's accrued debt over the next decade, according to a preliminary analysis from the Congressional Budget Office.
Of that amount, an estimated $5.6 trillion will be in interest alone.
By 2020, the agency estimates debt held by the public would reach $20.3 trillion, or 90% of GDP. That's up from 53% of GDP in 2009.
Research done by economists Kenneth Rogoff and Carmen Reinhart has shown that such high levels of debt can cause a drag on economic growth.
The CBO cited two big contributors to the jump in debt.
One is the president's proposal to extend the 2001 and 2003 tax cuts for the majority of Americans. The other is the proposal to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax (AMT).
Together those proposals would cost $3 trillion between 2011 and 2020.
"It points out the unwillingness of the administration to raise the revenues to pay for the size of government being proposed," said Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group.
If Congress doesn't act, all of the Bush tax cuts are slated to expire at the end of this year and there will be no protection from the AMT.
But current law is not politically realistic, many say. That's why the administration prefers to compare the cost of its proposals to what lawmakers are likely to do -- namely, extend tax cuts and fix the AMT.
Hence, the White House Budget Office estimates that under the president's proposals, $8.5 trillion would be added to the country's accrued debt over the next decade, or $1.3 trillion less than the CBO estimate.
Either scenario is unsustainable, Bixby said.
The administration has also called the budget trajectory unsustainable and the president has created a fiscal advisory commission to recommend ways lawmakers can get annual deficits down to 3% of GDP by 2015.
That's well below where it would be under the president's budget, according to estimates from both the CBO and the White House. And while his proposals would chip away at deficits in the next few years, they start to climb again thereafter. By 2020, the annual deficit as a percentage of GDP will be 5.6%, according to the CBO. The White House estimates it will be 4.2%.
But there is no guarantee the fiscal commission's recommendations will be adopted by lawmakers.
The CBO notes that its estimates incorporate the Administration's revenue and spending assumptions for policies such as health reform and climate change, because the agency didn't have sufficient details from the White House about those policies to do its own analysis.
A full analysis of the president's budget will be published later in the month, the CBO said.
For more, go to http://money.cnn.com/video/news/2010/02/19/n_interview_simpson_bowles.cnnmoney/
http://money.cnn.com/2010/03/05/news/economy/cbo_obama_budget/index.htm
By Jeanne Sahadi, senior writerMarch 5, 2010: 6:13 PM ET
NEW YORK (CNNMoney.com) -- If President Obama's 2011 budget were put into effect as proposed, the U.S. federal government would add an estimated $9.8 trillion to the country's accrued debt over the next decade, according to a preliminary analysis from the Congressional Budget Office.
Of that amount, an estimated $5.6 trillion will be in interest alone.
By 2020, the agency estimates debt held by the public would reach $20.3 trillion, or 90% of GDP. That's up from 53% of GDP in 2009.
Research done by economists Kenneth Rogoff and Carmen Reinhart has shown that such high levels of debt can cause a drag on economic growth.
The CBO cited two big contributors to the jump in debt.
One is the president's proposal to extend the 2001 and 2003 tax cuts for the majority of Americans. The other is the proposal to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax (AMT).
Together those proposals would cost $3 trillion between 2011 and 2020.
"It points out the unwillingness of the administration to raise the revenues to pay for the size of government being proposed," said Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group.
If Congress doesn't act, all of the Bush tax cuts are slated to expire at the end of this year and there will be no protection from the AMT.
But current law is not politically realistic, many say. That's why the administration prefers to compare the cost of its proposals to what lawmakers are likely to do -- namely, extend tax cuts and fix the AMT.
Hence, the White House Budget Office estimates that under the president's proposals, $8.5 trillion would be added to the country's accrued debt over the next decade, or $1.3 trillion less than the CBO estimate.
Either scenario is unsustainable, Bixby said.
The administration has also called the budget trajectory unsustainable and the president has created a fiscal advisory commission to recommend ways lawmakers can get annual deficits down to 3% of GDP by 2015.
That's well below where it would be under the president's budget, according to estimates from both the CBO and the White House. And while his proposals would chip away at deficits in the next few years, they start to climb again thereafter. By 2020, the annual deficit as a percentage of GDP will be 5.6%, according to the CBO. The White House estimates it will be 4.2%.
But there is no guarantee the fiscal commission's recommendations will be adopted by lawmakers.
The CBO notes that its estimates incorporate the Administration's revenue and spending assumptions for policies such as health reform and climate change, because the agency didn't have sufficient details from the White House about those policies to do its own analysis.
A full analysis of the president's budget will be published later in the month, the CBO said.
For more, go to http://money.cnn.com/video/news/2010/02/19/n_interview_simpson_bowles.cnnmoney/
Monday, February 15, 2010
Curbing debt: Shoulda, coulda. Now gotta
http://money.cnn.com/2010/02/15/news/economy/reducing_debt/index.htm
By Jeanne Sahadi, senior writerFebruary 15, 2010: 9:07 AM ET
NEW YORK (CNNMoney.com) -- In the past five years, the administrations of both parties have tried to reform three big-ticket items: the tax code, health care and Social Security.
The reform efforts would have helped put the federal budget on a more sustainable course.
But all have been tabled in one form or another because of partisan resistance to key ideas.
Now policymakers' work is infinitely harder as they wake up to the realization that they must deal soon with the country's long-term fiscal problems.
At stake ultimately is the United States' status as a first-class economy.
"It's going to take bold strokes to deal with this challenge. It's going to take big ideas, and it's going to take political courage because it's every hot-button issue that's out there. It is Social Security. It is Medicare. It is revenue. All of them," said Senate Budget Chairman Kent Conrad, D-N.D., at a hearing last week on fiscal sustainability.
The president's yet-to-be formed bipartisan fiscal commission will be asked to propose ways to hit two key targets:
As things stand today, federal spending -- much of it in Medicare and to a lesser degree Social Security -- is on track to grow much faster than the economy for decades.
To achieve better fiscal balance after the economy recovers means that lawmakers will have to agree to measures that run contrary to the ideologies of the left and the right: Cut spending and raise taxes.
"And [the plan] must have the support of the leadership of both political parties," said Alice Rivlin, former vice chairman of the Federal Reserve, former White House budget director under President Clinton and former director of the Congressional Budget Office.
Rivlin and former Republican Senator Pete Domenici have formed a bipartisan debt-reduction task force that will craft a debt-reduction budget plan for Congress and the public to consider by the end of the year.
They, like other deficit-hawk groups, are suggesting that lawmakers seriously reconsider a number of proposals made in the past five years. Here are just five that likely will get more play in coming months.
Raise the Social Security retirement age: Currently, the full retirement age is set to hit 67 in 2027. Moving up that timetable, and then adjusting the retirement age by just 1 month every 2 years after that, could take care of nearly a third of the long-term shortfall in Social Security.
"As life expectancy increases, we just can't afford to support people in retirement for as long as we have currently under these programs," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers.
Slow the growth of entitlement benefits: To protect lower income seniors who depend most heavily on their Social Security benefits, one option would be to slow the growth of initial benefits for higher income people.
In terms of Medicare, MacGuineas said, one option is to ask higher income retirees who can afford it to contribute more to the cost of their benefits.
Reduce health insurance tax breaks: Everyone agrees controlling health costs is one of the biggest steps needed to reduce the growth in U.S. debt over time. One of the most effective ways to do so is to reduce or eliminate the tax breaks workers get when they buy their insurance at work.
Currently, the portion of premiums paid by employers is treated as tax-free compensation to workers, and there is no limit on how much employers may contribute. The cost in forgone revenue over 10 years is $2.5 trillion, Conrad said.
A cap would mean workers would pay income tax on the portion of their employer's contribution above the cap.
The theory is that workers would avoid paying income tax by choosing lower-cost plans over time.
Broaden the tax base: Close to half of tax filers will end up with no net federal income tax liability for 2009 thanks in large part to a complex host of credits, exemptions, deductions and exclusions. Those tax breaks reduce federal revenue intake by roughly $1 trillion a year.
"If we can get rid of a lot of tax expenditures, we can lower [marginal tax] rates actually below today's level and still raise additional revenues," said Rudolph Penner, a former CBO director who is now the co-chair of the Committee on the Fiscal Future of the United States.
Consider new revenue options: Generating more income tax revenue can be helpful, but raising taxes too high can dampen economic growth. So lawmakers will be looking for other sources of revenue on top of income taxes.
Among the ideas being considered is a national sales tax known as the value-added tax or a possible energy tax. To top of page
By Jeanne Sahadi, senior writerFebruary 15, 2010: 9:07 AM ET
NEW YORK (CNNMoney.com) -- In the past five years, the administrations of both parties have tried to reform three big-ticket items: the tax code, health care and Social Security.
The reform efforts would have helped put the federal budget on a more sustainable course.
But all have been tabled in one form or another because of partisan resistance to key ideas.
Now policymakers' work is infinitely harder as they wake up to the realization that they must deal soon with the country's long-term fiscal problems.
At stake ultimately is the United States' status as a first-class economy.
"It's going to take bold strokes to deal with this challenge. It's going to take big ideas, and it's going to take political courage because it's every hot-button issue that's out there. It is Social Security. It is Medicare. It is revenue. All of them," said Senate Budget Chairman Kent Conrad, D-N.D., at a hearing last week on fiscal sustainability.
The president's yet-to-be formed bipartisan fiscal commission will be asked to propose ways to hit two key targets:
- to get annual deficits to 3% of gross domestic product by 2015;
- to then stabilize the nation's total accrued debt at something far lower than 77% of GDP, which is where it would be by 2020 under President Obama's proposed 2011 budget.
As things stand today, federal spending -- much of it in Medicare and to a lesser degree Social Security -- is on track to grow much faster than the economy for decades.
To achieve better fiscal balance after the economy recovers means that lawmakers will have to agree to measures that run contrary to the ideologies of the left and the right: Cut spending and raise taxes.
"And [the plan] must have the support of the leadership of both political parties," said Alice Rivlin, former vice chairman of the Federal Reserve, former White House budget director under President Clinton and former director of the Congressional Budget Office.
Rivlin and former Republican Senator Pete Domenici have formed a bipartisan debt-reduction task force that will craft a debt-reduction budget plan for Congress and the public to consider by the end of the year.
They, like other deficit-hawk groups, are suggesting that lawmakers seriously reconsider a number of proposals made in the past five years. Here are just five that likely will get more play in coming months.
Raise the Social Security retirement age: Currently, the full retirement age is set to hit 67 in 2027. Moving up that timetable, and then adjusting the retirement age by just 1 month every 2 years after that, could take care of nearly a third of the long-term shortfall in Social Security.
"As life expectancy increases, we just can't afford to support people in retirement for as long as we have currently under these programs," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers.
Slow the growth of entitlement benefits: To protect lower income seniors who depend most heavily on their Social Security benefits, one option would be to slow the growth of initial benefits for higher income people.
In terms of Medicare, MacGuineas said, one option is to ask higher income retirees who can afford it to contribute more to the cost of their benefits.
Reduce health insurance tax breaks: Everyone agrees controlling health costs is one of the biggest steps needed to reduce the growth in U.S. debt over time. One of the most effective ways to do so is to reduce or eliminate the tax breaks workers get when they buy their insurance at work.
Currently, the portion of premiums paid by employers is treated as tax-free compensation to workers, and there is no limit on how much employers may contribute. The cost in forgone revenue over 10 years is $2.5 trillion, Conrad said.
A cap would mean workers would pay income tax on the portion of their employer's contribution above the cap.
The theory is that workers would avoid paying income tax by choosing lower-cost plans over time.
Broaden the tax base: Close to half of tax filers will end up with no net federal income tax liability for 2009 thanks in large part to a complex host of credits, exemptions, deductions and exclusions. Those tax breaks reduce federal revenue intake by roughly $1 trillion a year.
"If we can get rid of a lot of tax expenditures, we can lower [marginal tax] rates actually below today's level and still raise additional revenues," said Rudolph Penner, a former CBO director who is now the co-chair of the Committee on the Fiscal Future of the United States.
Consider new revenue options: Generating more income tax revenue can be helpful, but raising taxes too high can dampen economic growth. So lawmakers will be looking for other sources of revenue on top of income taxes.
Among the ideas being considered is a national sales tax known as the value-added tax or a possible energy tax. To top of page
Sunday, February 14, 2010
US debt will keep growing even with recovery
http://news.yahoo.com/s/ap/20100214/ap_on_bi_ge/us_deficit_crunch
By TOM RAUM, Associated Press Writer Tom Raum, Associated Press Writer
WASHINGTON – It's bad enough that Greece's debt problems have rattled global financial markets. In the world's largest economic and military power, there's a far more serious debt dilemma.
For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario — a full recovery and a return to prerecession employment levels.
The government already has made so many promises to so many expanding "mandatory" programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained.
Take Social Security, Medicare and other benefits. Add in interest payments on a national debt that now exceeds $12.3 trillion. It all will gobble up 80 percent of all federal revenues by 2020, government economists project.
That doesn't leave room for much else. What's left is the entire rest of the government, including military and homeland security spending, which has been protected and nurtured by the White House and Congress, regardless of the party in power.
The U.S. debt crisis also raises the question of how long the world's leading power can remain its largest borrower.
Moody's Investors Service recently warned that Washington's credit rating could be in jeopardy if the nation's finances didn't improve.
Despite election-year political pressure from voters for lawmakers to restrain spending, some recent votes suggests that Congress, left to its own devices, probably isn't up to the task of trimming deficits.
Both the Obama administration and Democratic leaders have put job creation ahead of deficit reduction for now.
The Senate faces an important vote after it returns on Feb. 22 from its President's Day recess on a bill intended to stimulate job growth. The legislation offers a $13 billion payroll tax credit for companies that hire unemployed workers, including an additional $1,000 tax credit for workers retained for a full year.
Proposed belt-tightening steps by President Barack Obama, including a freeze on some nondefense, nonentitlement spending, would make only a small dent in the mountain of debt.
The budget he submitted to Congress this month proposes record spending of $3.8 trillion for 2011. Taxes in next year's budget will support only $2.5 trillion of that spending, leaving $1.3 trillion to be borrowed.
The president's budget is a best-case outlook, from the administration's vantage point.
It doesn't take into account future liabilities from the growth of entitlement benefits and is based on projected economic growth that depends on a solid recovery. It assumes Congress will pass all of Obama's initiatives, including spending cuts and tax increases previously rejected by Congress.
Congress already has rejected a bipartisan deficit commission that could have forced Congress to take painful steps on tax increases and entitlements.
The commission would have been modeled on one that makes military base-closing decisions, forcing Congress to take up or down votes. The Senate turned aside the legislation last month after some original Republican supporters jumped ship once Obama endorsed the plan.
Proponents say this type of commission is the only way to make painful debt decisions. Obama says he'll create a bipartisan commission by presidential order instead.
"In the end, solving our fiscal challenge — so many years in the making — will take both parties coming together, putting politics aside, and making some hard choices about what we need to spend, and what we don't," Obama said in his weekly Saturday radio and internet address.
Still, his commission wouldn't have the power to force a congressional vote.
Obama's call for fiscal austerity came at the same time he signed legislation lifting the cap on government debt from $12.4 trillion — which is close to being breached — to $14.3 trillion to permit more borrowing.
The same law puts in place new budget rules praised by deficit hawks that would require future spending increases or tax cuts to be paid for with higher taxes or other spending cuts. "After a decade of profligacy, the American people are tired of politicians who talk the talk but don't walk the walk when it comes to fiscal responsibility," Obama said.
It's not clear when the debt's day of reckoning will arrive. But the overall national debt over the next few years will rise to 100 percent of the gross domestic product — a level viewed as alarming by the International Monetary Fund and international economists.
The Social Security system, the biggest social spending program, has begun paying out more in benefits than it collects in payroll taxes. For the past quarter-century, Social Security had produced a surplus that helped finance the rest of the government.
Medicare, the health care program that now covers 45 million elderly and disabled people, is in worse shape. It's been paying out more than it takes in since 2008 and its trust fund is projected to run out of money in 2017.
Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, suggested the nation's fast-growing indebtedness may not have a visible impact at this point on ordinary Americans. But some day it will pounce.
"One thing we can say with a fair amount of certainty," she said. "We never know when the wolf will be at our door. The wolf is very fickle and markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiment that we cannot predict."
By TOM RAUM, Associated Press Writer Tom Raum, Associated Press Writer
WASHINGTON – It's bad enough that Greece's debt problems have rattled global financial markets. In the world's largest economic and military power, there's a far more serious debt dilemma.
For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario — a full recovery and a return to prerecession employment levels.
The government already has made so many promises to so many expanding "mandatory" programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained.
Take Social Security, Medicare and other benefits. Add in interest payments on a national debt that now exceeds $12.3 trillion. It all will gobble up 80 percent of all federal revenues by 2020, government economists project.
That doesn't leave room for much else. What's left is the entire rest of the government, including military and homeland security spending, which has been protected and nurtured by the White House and Congress, regardless of the party in power.
The U.S. debt crisis also raises the question of how long the world's leading power can remain its largest borrower.
Moody's Investors Service recently warned that Washington's credit rating could be in jeopardy if the nation's finances didn't improve.
Despite election-year political pressure from voters for lawmakers to restrain spending, some recent votes suggests that Congress, left to its own devices, probably isn't up to the task of trimming deficits.
Both the Obama administration and Democratic leaders have put job creation ahead of deficit reduction for now.
The Senate faces an important vote after it returns on Feb. 22 from its President's Day recess on a bill intended to stimulate job growth. The legislation offers a $13 billion payroll tax credit for companies that hire unemployed workers, including an additional $1,000 tax credit for workers retained for a full year.
Proposed belt-tightening steps by President Barack Obama, including a freeze on some nondefense, nonentitlement spending, would make only a small dent in the mountain of debt.
The budget he submitted to Congress this month proposes record spending of $3.8 trillion for 2011. Taxes in next year's budget will support only $2.5 trillion of that spending, leaving $1.3 trillion to be borrowed.
The president's budget is a best-case outlook, from the administration's vantage point.
It doesn't take into account future liabilities from the growth of entitlement benefits and is based on projected economic growth that depends on a solid recovery. It assumes Congress will pass all of Obama's initiatives, including spending cuts and tax increases previously rejected by Congress.
Congress already has rejected a bipartisan deficit commission that could have forced Congress to take painful steps on tax increases and entitlements.
The commission would have been modeled on one that makes military base-closing decisions, forcing Congress to take up or down votes. The Senate turned aside the legislation last month after some original Republican supporters jumped ship once Obama endorsed the plan.
Proponents say this type of commission is the only way to make painful debt decisions. Obama says he'll create a bipartisan commission by presidential order instead.
"In the end, solving our fiscal challenge — so many years in the making — will take both parties coming together, putting politics aside, and making some hard choices about what we need to spend, and what we don't," Obama said in his weekly Saturday radio and internet address.
Still, his commission wouldn't have the power to force a congressional vote.
Obama's call for fiscal austerity came at the same time he signed legislation lifting the cap on government debt from $12.4 trillion — which is close to being breached — to $14.3 trillion to permit more borrowing.
The same law puts in place new budget rules praised by deficit hawks that would require future spending increases or tax cuts to be paid for with higher taxes or other spending cuts. "After a decade of profligacy, the American people are tired of politicians who talk the talk but don't walk the walk when it comes to fiscal responsibility," Obama said.
It's not clear when the debt's day of reckoning will arrive. But the overall national debt over the next few years will rise to 100 percent of the gross domestic product — a level viewed as alarming by the International Monetary Fund and international economists.
The Social Security system, the biggest social spending program, has begun paying out more in benefits than it collects in payroll taxes. For the past quarter-century, Social Security had produced a surplus that helped finance the rest of the government.
Medicare, the health care program that now covers 45 million elderly and disabled people, is in worse shape. It's been paying out more than it takes in since 2008 and its trust fund is projected to run out of money in 2017.
Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, suggested the nation's fast-growing indebtedness may not have a visible impact at this point on ordinary Americans. But some day it will pounce.
"One thing we can say with a fair amount of certainty," she said. "We never know when the wolf will be at our door. The wolf is very fickle and markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiment that we cannot predict."
Tuesday, February 2, 2010
Obama's budget: Impact on your taxes
http://money.cnn.com/2010/02/01/pf/taxes/obama_budget_tax_changes/index.htm
By Jeanne Sahadi, senior writer, February 2, 2010: 9:44 AM ET
NEW YORK (CNNMoney.com) -- President Obama, in his proposed 2011 budget, is calling on Congress to make a number of tax changes for individuals.
Some ideas are new. Many others were made last year, but not enacted by Congress. So the estimates of the revenue that may be raised by his proposals may be overly optimistic.
Across the universe of individual and corporate taxes, "what's most striking is how little new ground [the president's budget] ploughs," said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.
Here's a breakdown of some of Obama's key proposals for 2011 and beyond that would affect individuals:
High-income households
Let tax cuts expire: The 2001 and 2003 Bush tax cuts are scheduled to expire by 2011. Obama is sticking to his call to let those tax cuts expire for high-income households ($200,000 for individuals; $250,000 for families). The White House estimates close to $700 billion would be raised over 10 years.
This provision would raise the top two individual income tax rates to where they were in 2001, before passage of the Bush tax cuts. The 33% bracket would become 36%. And the 35% bracket would rise to 39.6%.
In addition, the long-term capital gains tax rate would increase to 20%, up from 15% currently.
The provision would also reinstate so-called phaseouts for high-income households, which would essentially reduce their eligibility for a host of personal exemptions.
The House may be amenable to letting the tax cuts expire in 2011 for wealthier Americans. But Stretch said it may be a tougher vote in the Senate, where there may be more of an inclination to wait until 2012 when the economy is expected to be on firmer footing.
Limit itemized deductions: The president proposes to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multipled by one's top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president's proposal.
Capping itemized deductions is a proposal he made last year and it went nowhere. That's in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it's likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.
The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.
Obama maps routes to lower deficits
Keep the estate tax: The president's budget assumes the estate tax will be made permanent at a $3.5 million exemption level per person and a top rate of 45% on taxable estates. That's much more generous than current law, which calls for a $1 million exemption level and a 55% top rate starting in 2011.
But it's less generous than a proposal getting bipartisan support in the Senate. The Senate proposal would institute a $5 million exemption level per person and a top rate of 35%.
Altering the estate tax to the levels Obama has proposed would increase the deficit by $262 billion over 10 years.
Raise taxes on investment fund manager profits: Obama would like to tax the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain. That would subject it to much higher tax rates than the 15% capital gains rate currently imposed. The White House estimates the measure would raise $24 billion over 10 years.
This is a carryover proposal from last year. While Congress hasn't acted on it yet, there's a fair chance they may move on it in the next year, since lawmakers will be looking for ways to pay for other costly legislation they'd like to pass.
Eliminate capital gains tax on small business stock: There are currently capital gains tax breaks in place for investors in small businesses, defined as companies with gross assets of $50 million or less. But the president is proposing to eliminate the capital gains tax altogether on stock in small businesses held for at least five years. The measure would only apply to stock acquired after Feb. 17, 2009. The cost of the president's proposal is an estimated $8.1 billion over 10 years.
Lower and middle income households
Make tax cuts permanent: The president's budget assumes all the 2001 and 2003 tax cuts will be made permanent for everyone making less than $200,000 ($250,000 for couples), which is the majority of American households.
That means, among other things, that today's rates on income tax, capital gains and dividends would remain the same.
It's an expensive proposition, however, costing federal coffers nearly $2 trillion over 10 years.
Permanently protect the middle class from the "wealth" tax: The administration assumes in the president's budget that Congress will permanently change the parameters of the Alternative Minimum Tax (AMT). That would protect tens of millions of middle-income families from having to pay the tax, which was originally intended only for the highest earners.
The cost of such a provision is close to $660 billion over 10 years.
Extend the Make Work Pay credit: The president's 2011 budget calls for a one-year extension of the stimulus-created tax credit that adds a few dollars to workers' paychecks every pay period. The extension is estimated to boost the deficit by $61.2 billion over 10 years.
Calling for just a one-year extension is a switch from Obama's call to make the credit permanent last year. The hope may still be that the credit is renewed every year -- as many tax breaks are. But by only calling for a one-year extension, the impact on the 10-year deficit appears to be less.
Permanently expand a low-income tax credit: The stimulus package temporarily expanded the Earned Income Tax Credit for very low-income families with three or more children. The expansion meant such families could claim a credit equal to 45% of their qualifying earnings, up from 40%, so that they could get a maximum credit of $5,657. President Obama wants to make that increase permanent at an estimated cost of $15.2 billion over 10 years.
Expand child-care tax credit: Under the president's budget, families making less than $85,000 would be able to claim nearly double the child and dependent care tax credit for which they currently qualify. The White House estimates the increase will raise the deficit by $12.6 billion over 10 years.
Permanently extend the American Opportunity Tax Credit: Created under stimulus legislation, the American Opportunity Tax Credit expanded for 2009 and 2010 the existing Hope Scholarship tax credit and made it partially refundable -- meaning that a tax filer could get money back even if it meant he or she would be getting back more from Uncle Sam than paid in federal income tax.
The credit is worth up to $2,500 for higher education expenses, up from $1,800 previously. The president would like to make the measure permanent, adding to the deficit by $75.4 billion over 10 years.
By Jeanne Sahadi, senior writer, February 2, 2010: 9:44 AM ET
NEW YORK (CNNMoney.com) -- President Obama, in his proposed 2011 budget, is calling on Congress to make a number of tax changes for individuals.
Some ideas are new. Many others were made last year, but not enacted by Congress. So the estimates of the revenue that may be raised by his proposals may be overly optimistic.
Across the universe of individual and corporate taxes, "what's most striking is how little new ground [the president's budget] ploughs," said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.
Here's a breakdown of some of Obama's key proposals for 2011 and beyond that would affect individuals:
High-income households
Let tax cuts expire: The 2001 and 2003 Bush tax cuts are scheduled to expire by 2011. Obama is sticking to his call to let those tax cuts expire for high-income households ($200,000 for individuals; $250,000 for families). The White House estimates close to $700 billion would be raised over 10 years.
This provision would raise the top two individual income tax rates to where they were in 2001, before passage of the Bush tax cuts. The 33% bracket would become 36%. And the 35% bracket would rise to 39.6%.
In addition, the long-term capital gains tax rate would increase to 20%, up from 15% currently.
The provision would also reinstate so-called phaseouts for high-income households, which would essentially reduce their eligibility for a host of personal exemptions.
The House may be amenable to letting the tax cuts expire in 2011 for wealthier Americans. But Stretch said it may be a tougher vote in the Senate, where there may be more of an inclination to wait until 2012 when the economy is expected to be on firmer footing.
Limit itemized deductions: The president proposes to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multipled by one's top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president's proposal.
Capping itemized deductions is a proposal he made last year and it went nowhere. That's in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it's likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.
The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.
Obama maps routes to lower deficits
Keep the estate tax: The president's budget assumes the estate tax will be made permanent at a $3.5 million exemption level per person and a top rate of 45% on taxable estates. That's much more generous than current law, which calls for a $1 million exemption level and a 55% top rate starting in 2011.
But it's less generous than a proposal getting bipartisan support in the Senate. The Senate proposal would institute a $5 million exemption level per person and a top rate of 35%.
Altering the estate tax to the levels Obama has proposed would increase the deficit by $262 billion over 10 years.
Raise taxes on investment fund manager profits: Obama would like to tax the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain. That would subject it to much higher tax rates than the 15% capital gains rate currently imposed. The White House estimates the measure would raise $24 billion over 10 years.
This is a carryover proposal from last year. While Congress hasn't acted on it yet, there's a fair chance they may move on it in the next year, since lawmakers will be looking for ways to pay for other costly legislation they'd like to pass.
Eliminate capital gains tax on small business stock: There are currently capital gains tax breaks in place for investors in small businesses, defined as companies with gross assets of $50 million or less. But the president is proposing to eliminate the capital gains tax altogether on stock in small businesses held for at least five years. The measure would only apply to stock acquired after Feb. 17, 2009. The cost of the president's proposal is an estimated $8.1 billion over 10 years.
Lower and middle income households
Make tax cuts permanent: The president's budget assumes all the 2001 and 2003 tax cuts will be made permanent for everyone making less than $200,000 ($250,000 for couples), which is the majority of American households.
That means, among other things, that today's rates on income tax, capital gains and dividends would remain the same.
It's an expensive proposition, however, costing federal coffers nearly $2 trillion over 10 years.
Permanently protect the middle class from the "wealth" tax: The administration assumes in the president's budget that Congress will permanently change the parameters of the Alternative Minimum Tax (AMT). That would protect tens of millions of middle-income families from having to pay the tax, which was originally intended only for the highest earners.
The cost of such a provision is close to $660 billion over 10 years.
Extend the Make Work Pay credit: The president's 2011 budget calls for a one-year extension of the stimulus-created tax credit that adds a few dollars to workers' paychecks every pay period. The extension is estimated to boost the deficit by $61.2 billion over 10 years.
Calling for just a one-year extension is a switch from Obama's call to make the credit permanent last year. The hope may still be that the credit is renewed every year -- as many tax breaks are. But by only calling for a one-year extension, the impact on the 10-year deficit appears to be less.
Permanently expand a low-income tax credit: The stimulus package temporarily expanded the Earned Income Tax Credit for very low-income families with three or more children. The expansion meant such families could claim a credit equal to 45% of their qualifying earnings, up from 40%, so that they could get a maximum credit of $5,657. President Obama wants to make that increase permanent at an estimated cost of $15.2 billion over 10 years.
Expand child-care tax credit: Under the president's budget, families making less than $85,000 would be able to claim nearly double the child and dependent care tax credit for which they currently qualify. The White House estimates the increase will raise the deficit by $12.6 billion over 10 years.
Permanently extend the American Opportunity Tax Credit: Created under stimulus legislation, the American Opportunity Tax Credit expanded for 2009 and 2010 the existing Hope Scholarship tax credit and made it partially refundable -- meaning that a tax filer could get money back even if it meant he or she would be getting back more from Uncle Sam than paid in federal income tax.
The credit is worth up to $2,500 for higher education expenses, up from $1,800 previously. The president would like to make the measure permanent, adding to the deficit by $75.4 billion over 10 years.
Friday, November 20, 2009
$4.8 trillion - Interest on U.S. debt
How can the U.S. afford yet another entitlement program? It needs to recognize America is a poor country.
http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm
Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard of levels.
By Jeanne Sahadi, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.
More than half. In fact, $4.8 trillion.
If that's hard to grasp, here's another way to look at why that's a problem.
In 2015 alone, the estimated interest due - $533 billion - is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.
On the bright side - such as it is - the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates.
But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous.
All the more so because interest rates will rise when private sector borrowers return to the debt market and compete with the government for capital. At that point, the country's interest payments could jack up very fast.
"When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt," Konigsberg said.
The Congressional Budget Office, which made the $4.8 trillion forecast, already baked some increase in rates into the cake. But there is always a chance those estimates may prove too conservative.
And then it's Vicious Circle 101 - well known to anyone who has gotten too into hock with Visa and MasterCard.
The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government.
Higher rates in turn make it harder to pay off the underlying debt because more and more money is going to pay off interest - money, by the way, which is also borrowed.
And as more money goes to interest, creditors may become concerned that the country can't pay down its principal and lawmakers will have less to fund all the things government is supposed to do.
"[P]olicymakers would be less able to pay for other national spending priorities and would have less flexibility to deal with unexpected developments (such as a war or recession). Moreover, rising interest costs would make the economy more vulnerable to a meltdown in financial markets," the CBO wrote in its most recent long-term budget outlook.
So far, that crisis of confidence hasn't happened. And no one can predict with any certainty whether or when it could occur.
But should it occur, the change could be abrupt.
That's because the government frequently rolls over - or refinances - the debt it has issued as it comes due.
In other words, when a Treasury bond or note matures, the government must pay the investor the face value on that debt. In order to do that, the Treasury borrows money to pay back the investor, which means the debt would be refinanced at whatever the going interest rates are at the time.
Just how much churn is there? Of late, a fair bit it seems. A Treasury borrowing advisory committee reported in early November that "approximately 40 percent of the debt will need to be refinanced in less than one year."
Since rates may well stay low over the next year, it's possible that debt could be refinanced at the same or even lower rates. But that situation won't last forever.
So what will Washington do?
To help mitigate the potential risk of rising rates, the Treasury has said it would start increasing the average maturity of the new debt it issues. That way the debt it refinances in the next couple of years will be locked in at lower rates for longer periods of time.
And the Obama administration has promised to produce a deficit-reduction plan that would aim to bring down annual deficits to roughly 3% of GDP over the next several years, below the 4% to 5% currently projected.
If that happens, the $4.8 trillion in interest payments that CBO estimates for the next decade could go down if interest rates don't increase as much as CBO expects.
"There will be less debt outstanding than if we don't get the deficit down. It may also reduce [the average interest rate on the debt] since less debt means less pressure on interest rates," said William Gale, co-director of the Tax Policy Center.
But whether they can do that within a few years of an economic recovery is another matter. "Even under the president's [2010] budget as evaluated by the CBO we do not get anywhere close to that," Gale said.
That could mean the president's 2011 budget proposals would have to make a lot of changes to get closer to the 3% goal. Unpopular changes like tax hikes and spending cuts.
Budget hawks hope the president will push for a deficit-reduction commission to come up with ways to cut the deficit and then propose legislation that lawmakers would only be able to vote for or against. The reason: There is no political will to make the tough calls. Especially in a mid-term election year.
First Published: November 19, 2009: 11:58 AM ET
http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm
Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard of levels.
By Jeanne Sahadi, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.
More than half. In fact, $4.8 trillion.
If that's hard to grasp, here's another way to look at why that's a problem.
In 2015 alone, the estimated interest due - $533 billion - is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.
On the bright side - such as it is - the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates.
But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous.
All the more so because interest rates will rise when private sector borrowers return to the debt market and compete with the government for capital. At that point, the country's interest payments could jack up very fast.
"When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt," Konigsberg said.
The Congressional Budget Office, which made the $4.8 trillion forecast, already baked some increase in rates into the cake. But there is always a chance those estimates may prove too conservative.
And then it's Vicious Circle 101 - well known to anyone who has gotten too into hock with Visa and MasterCard.
The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government.
Higher rates in turn make it harder to pay off the underlying debt because more and more money is going to pay off interest - money, by the way, which is also borrowed.
And as more money goes to interest, creditors may become concerned that the country can't pay down its principal and lawmakers will have less to fund all the things government is supposed to do.
"[P]olicymakers would be less able to pay for other national spending priorities and would have less flexibility to deal with unexpected developments (such as a war or recession). Moreover, rising interest costs would make the economy more vulnerable to a meltdown in financial markets," the CBO wrote in its most recent long-term budget outlook.
So far, that crisis of confidence hasn't happened. And no one can predict with any certainty whether or when it could occur.
But should it occur, the change could be abrupt.
That's because the government frequently rolls over - or refinances - the debt it has issued as it comes due.
In other words, when a Treasury bond or note matures, the government must pay the investor the face value on that debt. In order to do that, the Treasury borrows money to pay back the investor, which means the debt would be refinanced at whatever the going interest rates are at the time.
Just how much churn is there? Of late, a fair bit it seems. A Treasury borrowing advisory committee reported in early November that "approximately 40 percent of the debt will need to be refinanced in less than one year."
Since rates may well stay low over the next year, it's possible that debt could be refinanced at the same or even lower rates. But that situation won't last forever.
So what will Washington do?
To help mitigate the potential risk of rising rates, the Treasury has said it would start increasing the average maturity of the new debt it issues. That way the debt it refinances in the next couple of years will be locked in at lower rates for longer periods of time.
And the Obama administration has promised to produce a deficit-reduction plan that would aim to bring down annual deficits to roughly 3% of GDP over the next several years, below the 4% to 5% currently projected.
If that happens, the $4.8 trillion in interest payments that CBO estimates for the next decade could go down if interest rates don't increase as much as CBO expects.
"There will be less debt outstanding than if we don't get the deficit down. It may also reduce [the average interest rate on the debt] since less debt means less pressure on interest rates," said William Gale, co-director of the Tax Policy Center.
But whether they can do that within a few years of an economic recovery is another matter. "Even under the president's [2010] budget as evaluated by the CBO we do not get anywhere close to that," Gale said.
That could mean the president's 2011 budget proposals would have to make a lot of changes to get closer to the 3% goal. Unpopular changes like tax hikes and spending cuts.
Budget hawks hope the president will push for a deficit-reduction commission to come up with ways to cut the deficit and then propose legislation that lawmakers would only be able to vote for or against. The reason: There is no political will to make the tough calls. Especially in a mid-term election year.
First Published: November 19, 2009: 11:58 AM ET
Friday, July 17, 2009
Budget Blow for Health Plan
By GREG HITT
WASHINGTON -- Congress's chief budget scorekeeper cast a new cloud over Democratic efforts to overhaul the nation's health-care system, telling lawmakers Thursday that the main proposals being considered would fail to contain costs -- one of the primary goals -- and could actually worsen the problem of rapidly escalating medical spending.
"We do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount," Douglas Elmendorf, director of the Congressional Budget Office, told the Senate Budget Committee. "On the contrary, the legislation significantly expands the federal responsibility for health-care costs," he added.
To read the rest of the article, click on:
http://online.wsj.com/article/SB124775966602252285.html
The letter from Mr. Elmendorf to Ways and Means Chair Rangel can be found at:
http://www.cbo.gov/ftpdocs/104xx/doc10430/House_Tri-Committee-Rangel.pdf
WASHINGTON -- Congress's chief budget scorekeeper cast a new cloud over Democratic efforts to overhaul the nation's health-care system, telling lawmakers Thursday that the main proposals being considered would fail to contain costs -- one of the primary goals -- and could actually worsen the problem of rapidly escalating medical spending.
"We do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount," Douglas Elmendorf, director of the Congressional Budget Office, told the Senate Budget Committee. "On the contrary, the legislation significantly expands the federal responsibility for health-care costs," he added.
To read the rest of the article, click on:
http://online.wsj.com/article/SB124775966602252285.html
The letter from Mr. Elmendorf to Ways and Means Chair Rangel can be found at:
http://www.cbo.gov/ftpdocs/104xx/doc10430/House_Tri-Committee-Rangel.pdf
Monday, July 13, 2009
National debt and federal budget
http://dailybail.com/home/peter-schiff-of-course-were-not-going-to-pay-back-the-chines.html
This may or may not be funny, depending on how you look at it. But I think Peter Schiff is spot on.
Here is a similar clip by Pete Peterson, on Charlie Rose on PBS:
http://dailybail.com/home/pete-peterson-on-charlie-rose-we-are-headed-for-default-clip.html
And here is an interesting clip on the perspective of President Obama's announcement that he would reduce the federal budget by $100 million:
http://dailybail.com/home/president-obamas-budget-cuts-visualized-video.html
This may or may not be funny, depending on how you look at it. But I think Peter Schiff is spot on.
Here is a similar clip by Pete Peterson, on Charlie Rose on PBS:
http://dailybail.com/home/pete-peterson-on-charlie-rose-we-are-headed-for-default-clip.html
And here is an interesting clip on the perspective of President Obama's announcement that he would reduce the federal budget by $100 million:
http://dailybail.com/home/president-obamas-budget-cuts-visualized-video.html
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