New Congress Part 1: Deficits, tax cuts, lame ducks

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Following the November 2 elections, Republicans are taking the lead in the House and have strengthened their position in the Senate, which means there is much talk of permanently extending the Bush tax cuts.

With Democrats controlling the Senate and a Democrat in the White House, consensus won’t come easy. Furthermore, there is a lame-duck session before the new Congress takes over. One thing is certain, however; the new Republican House leadership appears determined to extend the Bush tax cuts for all taxpayers.


White House commission

President Obama has appointed a commission led by members of both major parties to study possible plans to bring down the deficit. Erskine Bowles, President Bill Clinton’s chief of staff, and former Senator Alan Simpson (R-WY) co-chair the commission. They recently announced a plan they project will, over time, cut the deficit by $3.8 trillion. The plan includes:

  • Reducing Social Security spending by raising the retirement age to 68 in the year 2050, and to 69 in the year 2075. They also want to slow the rate of growth of Social Security benefits. If these two measures are implemented, the savings would be realized between 2012 and 2020.
  • Lowering tax rates to three levels: 8 percent, 14 percent, and 23 percent.
  • Eliminating all tax breaks, including the home mortgage deduction. Bowles speculated that some tax breaks might be salvaged if offsetting cuts are offered.

If these measures are adopted, the commission projects that $100 billion per year of taxpayer money will be saved.

According to Bowles, none of these proposals would take effect next year while the country is still in what he referred to as economic recovery. He added that 75 percent of the savings would come from spending cuts, and the rest from higher taxes.

“We have harpooned every whale in the ocean and some of the minnows,” said Simpson. “No one has done this before.”

Discretionary spending

If the commission’s plan is accepted, the White House and Congress will see 15 percent cuts in their discretionary spending budgets. In addition, the federal workforce would be cut by 10 percent, and federal salaries would be frozen. Together these reductions equal $1.4 trillion, and would be split between domestic spending and defense spending.

By 2015, these cuts could reduce the deficit to 2.2 percent of the gross domestic product, down from the current level of 9 percent of GDP. By 2024, these measures also would reduce the debt to 60 percent of GDP.

“This country is out of money and we better start thinking,” said Bowles. "[Without] tough choices, we’re on the most predictable path toward an economic crisis that I can imagine.”

Will President Obama accept the plan? Bowles hopes so, but added, “This is Al’s and my proposal, nobody else’s. The president hasn’t seen this proposal.”

As for the president’s financial advisors, those who have seen it like some elements of the plan and not others.


Other plans

Rep. Dave Camp (R-MI) soon will become the chairman of the powerful tax-writing House Ways and Means Committee. He admitted he has not had time to fully develop his agenda, but as the chief tax writer for the United States, he would like to focus on the following:

  • Extending the Bush tax cuts if that has not already been addressed in the lame duck session
  • Fundamentally reforming the tax code, eliminating what he calls the inefficiencies, the inequities, and the burdens
  • Repealing and replacing the health care law

Camp’s top priority is making the Bush tax cuts permanent. This will include reduced individual income tax rates, capital gains and dividend rates of 15 percent, a higher childcare credit, an increase dependent care deduction, and a repeal of the personal exemption phase-out.

“I believe we ought to permanently extend the tax relief,” Camp told reporters earlier this month. “I don't want to see a wet blanket thrown over the beginnings of economic recovery.”

He would like to see these items addressed before Congress adjourns for the year, but until January, he has no control over the agenda. Meanwhile, there is much speculation about what could happen, if anything, in the remaining weeks of 2010.


Lame ducks

Congress went back to work November 15, but only for a week before adjourning for Thanksgiving. Though lawmakers originally had hoped to adjourn for the year by December 3, there is talk of remaining at work right up until Christmas.

Absent a decision on tax rates in the very near future, employers will have no choice but to withhold at higher rates that will automatically kick in beginning in January. Later, assuming the Bush cuts are extended, employers will have to calculate how much was over-withheld for every employee, and refund that amount.  

Rep. John Boehner (R-OH), the presumptive leader of the new Congress, said in a statement that he is calling on Congress to extend the tax cuts during the lame duck session.

“Stagnant and stubbornly high unemployment makes clear why permanently stopping all the looming tax hikes should top Washington's to-do list this month,” Boehner said.

In a press conference shortly after the Republicans took the House earlier this month, Obama acknowledged the need for quick, cooperative action, but stuck to his contention that tax cuts should remain only for certain groups.

“Now, the single most important thing I think we need to do economically, and this is something that has to be done during the lame duck session, is make sure that taxes don’t go up on middle-class families next year,” he said.

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