Tax agreement reached with no regard for nation’s mounting debt

January 11, 2011 By    

Editor’s note: This column was written before the 111th Congress finished its business.

As December unfolded, a warning went up in Washington – hold on to your hats and wallets.

It’s tax time and the end of the session in Congress, and that often leads to trouble.

The good news is that the tax agreement reached between the White House and Republicans extends all Bush-era tax cuts for all Americans for two years. The bad news is that they are not paid for, but more on that later.

Extending the tax cuts certainly helps with tax planning – and not a minute too soon for citizens, businesses and their exasperated accountants. In exchange for agreeing to the two-year extension, President Barack Obama got several provisions he wanted, including an extension of unemployment benefits for 13 months and a 2 percent reduction on employee payroll taxes through 2011 that go for Social Security.

At press time, the agreement included (through 2011) the 45 cents per gallon tax credit for blending ethanol with gasoline, the 50 cents per gallon tax credit for alternative fuel, the tax credits for alternative fuel infrastructure and an incentive for businesses to write off 100 percent of capital investment made after Sept. 8, 2010, through Dec. 31, 2011.

However, liberal House Democrats opposed the agreement on the grounds that the White House only negotiated with Republicans and that the tax-cut extensions includes the wealthiest Americans.

Democrats were successful in getting one agenda item into the agreement – the extension of investment tax credits for wind, solar and other forms of renewable power.

The Democrats’ clear line in the sand was their opposition to the “estate tax.” The agreement sets this inheritance tax rate at 35 percent for individuals passing on more than $5 million to their heirs and for couples passing on more than $10 million. (In 2009, the House Democrats passed a bill that set the tax rate at 45 percent for individuals passing on more than $3.5 million to heirs.)

Rep. Chris Van Hollen, D-Md., argued that for an estimated cost of $23 billion to “our nation’s credit card” the U.S. is in effect borrowing “from China to give the wealthiest 6,600 estates a tax break averaging more than $1.5 million” under this agreement. Republicans argued that higher rates wouldn’t allow many family-owned small businesses to be passed down to future generations.

All of the hurry to act was about the fact that the current tax law expired on Dec. 31, 2010. Congress had to reach an agreement before then. Otherwise, taxes would have gone up for nearly everyone.

What the tax deal did not do is address the mounting burden of our country’s debt.

The belief of the president and Republicans is that the agreement will lead to a stronger economy and greater job growth in 2011 and 2012. Let’s hope they are correct. However, even if they are correct and we see greater economic and job growth over the next two years, the provisions are not paid for. The agreement’s payroll tax holiday provision totals more than $111 billion alone. The non-partisan Congressional Budget Office estimates the total tax and benefits package is expected to add more than $850 billion to the federal debt over the next five years.

Only two months ago, Republicans ran for office on a cut-the-deficit platform and accused President Obama’s stimulus plan of government intrusion, creeping socialism and adding to the debt. And while we can’t yet say definitively that post election, Republicans aren’t that different from Democrats, they have their work cut out for them.

The lesson so far is that either party just can’t refuse tax cuts. Paying for the cuts is not easy and something both parties are willing to sidestep for political expediency. The consequence for all of us is that Congress keeps kicking the responsibility to address our nation’s debt down the road.

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