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Considering the Fiscal Commission Recommendations
By Children’s Home Society of Florida Foundation
Last week, on February 10th, the House Budget Committee held a hearing and Congressional Budget Office (CBO) Director Douglas Elmendorf discussed the federal budget deficit. Director Elmendorf emphasized the importance of addressing the deficit and also noted that the Fiscal Commission recommendations are a useful addition to the current discussion.
Of Paul Ryan
Chairman Paul Ryan noted that there still is a major problem with unemployment. According to Chairman Ryan, the recession ended in June of 2009 and between that time and December of 2010, “payroll employment rose by a mere 6/100 of 1% (0.06%).” Chairman Ryan noted that it is essential to restore growth in America. He advocated “low taxes, reasonable regulations sound money and spending restraint.”
Of Chris Van Hollen
Ranking Member Chris Van Hollen (D-MD) also responded to Director Elmendorf. He indicated a willingness to address the deficit. Rep. Van Hollen suggested that “Democrats and Republicans must work together now to put our nation on a fiscally sustainable path and we stand ready to do that.”
Assessment
However, Rep. Lloyd Doggett (D-TX) expressed concern that Chairman Ryan was focusing excessively on spending rather than on tax deductions. Rep. Doggett noted, “Dollar for dollar, cutting funding for cancer research or local law enforcement has the same effect on the deficit as closing a tax loophole that allows a Wall Street corporation to benefit by stashing their tax dollars offshore.” Rep. Doggett suggests that tax deductions will need to be reduced in order to address the deficit challenge.
Conclusion
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Filed under: Alternative Investments, Breaking News, Experts Invited, Financial Planning | Tagged: Chris Van Hollen, COngressional Budget Office, Douglas Elmendorf, Fiscal Commission, Lloyd Doggett, Paul Ryan |
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House and Senate Join Budget Debate
Following a release by the White House Office of Management and Budget (OMB) of the proposed budget for fiscal year 2012, OMB Director Jacob Lew testified before the House Budget Committee.
House Budget Chair Paul Ryan (R-WI) expressed concern about the direction of spending in the budget. He stated, “Instead of confronting our debt head on, the President has presented us with a budget that spends too much, borrows too much and taxes too much. His budget would double the amount of debt held by the public by the end of his term – and triple it by the 10th anniversary of his inauguration.”
In the view of Rep. Ryan, President Obama did not follow the advice of Erskine Bowles, the Democratic Chairman of the White House Fiscal Commission. According to Mr. Bowles, the new budget goes “nowhere near where they have to go to resolve our fiscal nightmare.”
The Ranking Member of the House Budget Committee is Chris Van Hollen (D-MD). He thanked Budget Director Lew for his service to the nation and noted, “I want to commend the President for submitting a budget that reduces our deficit, while also investing in our future. This is a tough love budget. It cuts non-security discretionary spending by $400 billion over the next decade – taking that category of spending to the lowest share of GDP since the Eisenhower Administration.”
Rep. Van Hollen was pleased that the budget also included investments in research and development, education and clean energy. He further noted that it is not possible to “balance the budget with domestic discretionary spending” because cuts to that area could only impact 12% of the budget. His preference for deficit reduction focused on increasing taxes on oil companies.
Senators also offered opinions on the new budget. Sen. Kent Conrad (D-ND) was the prime motivator behind creation of the fiscal commission last year. He suggested that “the President’s budget gets it about right in the first year.”
However, Sen. Conrad expressed major concern about future debt and deficit reduction. He continued, “A debt that is too high acts like an anchor on the economy, reduces future economic growth, reduces opportunity for the American people, reduces job prospects for those seeking employment.” Sen. Conrad noted that the spending levels are the highest percentage of the economy in 60 years and revenue is currently at the lowest percentage of the economy in 60 years. He suggested that some of the fiscal commission solutions were not perfect, but were a major potential step in the right direction.
Sen. Orrin Hatch (R-UT) also expressed concern about the deficit and future taxes. Sen. Hatch quoted American Poet Ogden Nash. Mr. Nash once wrote, “The more you earn, the less you keep. And now I lay me down to sleep. I pray the Lord my soul to take, if the tax collector hasn’t got it before I wake.”
Sen. Hatch indicated that it is important to “restrain spending” or there will be a “monstrous tax hike” in the future.”
Source: Children’s Home Society of Florida Foundation
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White House Budget Release Starts Debate
On February 14th the White House released its proposed budget for fiscal year 2012. Following the release, there were extensive comments by the White House, Senate leaders and House of Representative leaders.
The new budget proposes spending $3.7 trillion next year. With an estimated total federal revenue of $2.6 trillion, the deficit is estimated to be $1.1 trillion.
The Congressional Budget Office (CBO) also projects revenue, deficit levels and tax provisions for the next decade. With the basic projections, the 10 year deficit will be $7.2 trillion.
However, with several “realistic” assumptions, the probable deficit increases over 10 years to $9.4 trillion. These “realistic” assumptions include a permanent increase in the exemption for alternative minimum tax, permanent extension of the 35% top income tax rate and 15% capital gain rate, and permanent extension of the $5 million applicable exclusion amount for estate taxes (plus indexed increases) and the 35% gift and estate rate.
There are several revenue raisers in the proposed budget. First, itemized deductions for high-income taxpayers would be capped at 28%. Higher-income persons who have deductions for home mortgages, charitable giving and state and local taxes would not receive the full benefit of those deductions. This proposal was also in the previous budget and was soundly rejected by the Senate.
Second, there are changes in international taxes designed to create more revenue for multi-national corporations. Third, a number of the deductions permitted to coal and gas companies would be limited.
Treasury Secretary Timothy Geithner testified before the Budget and Tax Committees of both the House and the Senate this week. In his comments before the House Ways and Means Committee on February 15, Secretary Geithner claimed that the budget was both fiscally responsible and invested in the future of the nation.
Mr. Geithner noted that the budget “stabilizes” the national debt. By 2016, the deficit declines to 3% of the economy. There is also a five year freeze on non-security discretionary domestic spending. Finally, while there are limits on spending, there are continued investments in research and development, education and clean energy.
Source: Children’s Home Society of Florida Foundation
Editor’s Note: The budget debate will surely continue for most of this year. The “realistic” White House assumptions are a reasonable indicator of the probable direction of those discussions. The White House may be suggesting a willingness to hold the top income tax rate at 35%, the top capital gain rate at 15% and the estate tax applicable exclusion amount at $5 million ( plus indexed increases) for next year and perhaps even the next decade. However, in Washington, the winds of change blow quickly and may change directions in the next week.
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House GOP Budget to Include Medicaid Block Grants, Medicare Changes
House Republicans will propose significant changes to the federal government’s major health programs—including block grants to Medicaid—in the budget they will unveil this week, the chairman of the House Budget Committee said Sunday.
In a “Fox News Sunday” interview, Rep. Paul Ryan (R-WI) said President Barack Obama’s fiscal year 2012 budget “does nothing to address the drivers of our debt,” and his committee’s budget for next year will propose statutory caps on discretionary spending, tax reform, and changes to the Medicare and Medicaid programs. Host Chris Wallace said reports have suggested the GOP proposal will cut spending by $2 trillion over the next decade, but Ryan said the plan will cut much more than that amount. He did not specify a figure, saying the numbers are still being fine-tuned
Source: Jessica Zigmod, Modern Healthcare [4/3/11]
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Budget Shutdown Would Not Halt Medicare
The Medicare program would continue to be funded if the government shuts down later this week, but other HHS programs would not, a senior administration official told reporters Wednesday.
With the latest short-term spending bill expiring April 8th, administration officials are preparing for a federal government shutdown that now appears imminent. One official said President Barack Obama has made it clear that a shutdown would threaten the country’s economic recovery, but added, “From a good-housekeeping perspective, we’re cognizant that it’s Wednesday and that all agencies are prepared with contingency plans.”
Source: Jessica Zigmond, Modern Healthcare [4/6/11]
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On the Government Shutdown and Healthcare Services
Although averted for now, if the federal government is forced to shut down next week, research at the National Institutes of Health campus would probably be affected immediately; it would take longer to be felt at the more than 3,000 research institutions funded by NIH across the country.
http://www.medpagetoday.com/Washington-Watch/Washington-Watch/25766
Craig
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IRS Budget Cut $606 Million
The House Appropriations Committee met and passed the tentative budget for next year for the IRS. The White House had requested $13.3 billion. The House Appropriations Committee released its Fiscal 2012 Financial Services and General Government Appropriations Bill. It included $11.5 billion for the IRS. That represents a cut from the current year of over $606 million.
The IRS cut would be approximately 5.5% of the budget. IRS Commissioner Douglas Shulman spoke to a Senate Appropriations Subcommittee earlier in the month. He stated that a cut in the IRS budget would reduce revenue collections and therefore increase the deficit.
The House Appropriations Committee Chair is Harold Rogers (R-KY). He published a release indicating that the IRS cut in the bill shows “the commitment of the Republican majority to reduce spending, dig our nation out of record deficits and rein in unnecessary agency regulation interference that obstructs economic growth.”
The ranking member on the House Appropriations Committee is Rep. Norm Dicks (D-WA). He opposed the cut and noted, “At this level, enforcement and customer assistance of the IRS would be adversely affected. The agency estimates that as many as 4,100 employees would have to be furloughed. The IRS estimates that this cut will end up costing $4 billion per year due to the lack of enforcement on tax cheats.”
National Treasury Employees Union (NTEU) President Colleen Kelley was very critical of the cut. She commented, “It simply makes no sense to slash the budget of the agency that generates 93% of the government’s revenue.”
Editor’s Note: The House Budget will eventually be modified in a conference with the Senate. It seems quite possible that a portion of the IRS budget may be restored. However, it is clear that the IRS and other governmental organizations will operate with leaner budgets in the future.
Source: Children’s Home Society of Florida Foundation
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Top Ten Tax Expenditures
As the White House and Congressional Leaders continue the budget deficit talks, there is ongoing discussion of the potential of reducing deductions. These tax deductions are frequently called “tax expenditures” because they reduce the total revenue for the government.
Many of these tax expenditures are quite popular with American taxpayers. Periodically, the Joint Committee on Taxation publishes the amounts of the tax expenditures. If the total value of all taxes saved through deductions is 100%, then each tax expenditure can be calculated in percentage terms. In effect, there is a pie graph that is equal to 100% and each tax expenditure can be calculated as a part of that pie.
Top tax expenditures include the following:
1. Health Insurance – Most health insurance is paid for by the employer and not taxable to the employee. This is the largest tax expenditure and equals 13% of the total.
2. Home Mortgage – Home mortgage interest is generally deductible with a $1 million mortgage limit. This is 9% of the total.
3. Capital Gains and Dividends – There is a 15% top rate for long-term capital gains and dividends. This is substantially lower than the ordinary income tax rate, which may be up to 35%. This tax expenditure is 8% of the total.
4. Medicare Benefits – While seniors pay a partial Medicare premium, most of the cost of Medicare is paid for by the government. This cost is tax-free to recipients and equals 7% of the total.
5. Pension Plans – Many pension plans are primarily funded by the employer, but some plans include a partial contribution by employees. A qualified plan enables those contributions to be made with pre-tax dollars. This equals 6% of the total.
6. Earned Income Tax Credits – Lower income families are permitted a refundable credit. This tax credit is 5% of the total.
7. State and Local Tax Deductions – Most tax payments to state and local governments are deductible on the federal return. This is a benefit that is particularly important for high-tax states. This tax expenditure is 5% of the total.
8. 401(k) Deductions – Most 401(k) plans have a pre-tax contribution by the employee. Many plans also include an employer match. This is 4% of the total.
9. Capital Gains in an Estate – Land, stock and homes may be appreciated in the estate. However, there typically is no capital gains tax if sold by the family at the estate value. This tax expenditure is 4% of the total.
10. Charitable Deductions – Donors may give cash or appreciated property to charity and receive a deduction. These deductions equal 4% of total tax expenditures.
Editor’s Note: Congress and the White House are discussing a number of tax expenditures and various limits. The challenge with reducing the deductions for the largest tax expenditures is that these changes will impact many American taxpayers.
Source: Children’s Home Society of Florida Foundation
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