Monday, July 26, 2010

POLITICS - Budget, Spending, and Tax Cuts

"Next Big Battle in Washington: Bush’s Tax Cuts" by DAVID M. HERSZENHORN, New York Times 7/24/2010

Excerpts

An epic fight is brewing over what Congress and President Obama should do about the expiring Bush tax cuts, with such substantial economic and political consequences that it could shape the fall elections and fiscal policy for years to come.

Democratic leaders, including Mr. Obama, say they are intent on letting the tax cuts for the wealthy expire as scheduled at the end of this year. But they have pledged to continue the lower tax rates for individuals earning less than $200,000 and families earning less than $250,000 — what Democrats call the middle class.

Most Republicans want to extend the tax cuts for everyone, and some Democrats agree, saying it would be unwise to raise taxes on anyone while the economy remains weak. If no action is taken, taxes on income, dividends, capital gains and estates would all rise.

The issue has generated little public attention this year as Congress grappled with health care, financial regulation, energy, a Supreme Court nomination and other divisive topics. But it will move to the top of the agenda when lawmakers return to Washington in September from their summer recess, just as the midterm campaign gets under way in earnest. In recent days, intense discussions have begun at the Capitol.

Beyond the implications for family checkbooks, the tax fight will serve as a proxy for the bigger political clashes of the year, including the size of government and the best way of handling the tepid economic recovery.
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If no tax legislation is passed, all the major tax reductions passed under President George W. Bush in 2001 and 2003 will expire, with rates reverting overnight on Dec. 31. The top marginal income tax rate, for example, would go back to 39.6 percent from 35 percent now, with corresponding increases in rates for lower income brackets.
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Some liberals want Mr. Obama to keep his promise to raise taxes on the rich, and the White House’s budget forecasts rely heavily on rolling the top income tax rates back to their pre-2001 levels. Some fiscal hawks warn that extending the tax cuts would add more than $2 trillion to the federal budget deficits at a time when the national debt is becoming an economic concern and a political issue. Political economists are fiercely divided.

So are Democrats. In recent days, fiscal conservatives like Senators Kent Conrad of North Dakota and Evan Bayh of Indiana expressed support for extending the tax cuts at all income levels, at least temporarily.
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But the questions go far beyond the basic issue of whether to allow the top two marginal income tax rates to rise.

Congress must also wrestle with the estate tax, which lapsed last year but will automatically be reinstated effectively at a 55 percent rate on Jan. 1 for estates larger than $1 million. Lawmakers must also deal with an array of other provisions, including tax rates on dividends and capital gains, and the Alternative Minimum Tax, which has been adjusted annually to prevent millions of middle-class families from paying higher tax bills. The child tax credit would also be reduced.

There are many permutations of permanent or short-term extensions of various provisions.

Reminder on the Budget Deficits and actual spending. NOT ONE DIME is spent by a budget. Spending is done by a written law or by Appropriations voted by congress each year. In the past (and future) there are budget items that are NOT funded (no money spent).

This is what allows politicians to "brag" to their constituents that a voted FOR a bill, but leaving out that they voted AGAINST funding the same bill when the Appropriations came up for a vote.

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