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Congress Passes Tax Cut Package

by Mike Godfrey,, Hong Kong

20 December 2010

Following previous approval by the United States Senate, the House of Representatives has also passed President Barack Obama’s bipartisan compromise tax package after a delay caused by opposition from the President’s own Democrat party colleagues.

During the lame duck session of Congress until next month, before the Republicans become the majority party in the House after the mid-term elections, the main point of contention between the Democrat and Republican parties has been whether it will be possible to extend some or all of the individual tax cuts enacted under the presidency of George W. Bush, which are due to expire at the end of this year.

Republicans proposed extending the tax cuts in their entirety, since they believe that nobody, and particularly small business owners, should be subject to higher taxes as the pace of the economic recovery is still uncertain. President Obama and Democrats insisted that Congress should only extend the Bush tax cuts for those taxpayers making less than USD250,000 a year, due to the high USD700bn fiscal cost entailed in their extension for those earning above that amount.

Earlier this month, in order to avoid the looming tax cuts’ expiry, President Obama and members of both parties were able to work out a USD858bn compromise package of tax cuts and benefits which could be acceptable to both sides.

While all of the Bush tax cuts will be extended temporarily for two years, including those for the wealthiest families, it was also agreed that unemployment insurance, which is also due to expire at the end of the year, will be extended for a further another 13 months, and there will be a 2% employee payroll tax cut for workers in 2011. In addition, the package will extend various tax credits for businesses, families and students that would also have expired at the end of December.

More controversially, the Republicans also obtained their wish that the federal estate tax, when reinstated in 2011, would be for two years at a reduced level of 35% (as against a top rate of 55%, to which it would have reverted) for estates of over USD5m.

In the end, it was the estate tax proposal which caused a delay in the House with Democrats insisting on a vote on a higher rate. That vote was lost by them, before the tax package as a whole was voted through with a large majority, despite some of the President’s own side still voting against.

After the vote, the Department of the Treasury released a statement from Treasury Secretary Tim Geithner in which he said: “We had a responsibility to protect middle class families from a tax increase that would have hit their paychecks and harmed the recovery. And while we do not agree on everything in this legislation, I applaud members of both parties in the House and Senate for coming together to pass a bill that includes tax relief for working families, extends unemployment insurance for Americans looking for work and provides a powerful boost to job creation.”

The House Speaker-designate John Boehner also expressed his satisfaction with the result. “With nearly one in 10 Americans out of work, acting to ensure no American’s taxes go up on January 1 was critically important,” he concluded. “Failing to stop all the tax hikes would have destroyed more jobs and deepened the uncertainty in our economy. Stopping all the tax hikes is a good first step in our efforts to reduce the uncertainty family-owned small businesses are facing, but much more needs to be done, including cutting spending, permanently eliminating the threat of job-killing tax hikes, and repealing the job-killing health care law. These are critical priorities the new majority has pledged to act on in the next Congress.”

On the other hand, critics continue to point out that the package will do nothing to reduce the high level of US public debt. Earlier this month, Moody’s, the credit ratings agency, had raised the possibility of a negative outlook for the country’s present top “Aaa” long-term credit rating, as the fiscal package would not improve, and would probably worsen, the US fiscal deficit, unless accompanied by other counterbalancing measures such as reductions to government spending.

TAGS: inheritance tax | tax | small business | business | law | payroll | tax credits | legislation | tax rates | United States | tax breaks | individual income tax

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