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Has Obama Got Future Tax Hikes Hidden Up His Sleeve?

by Mike Godfrey,, Washington

04 August 2011

While the deal to allow an increase to the United States debt ceiling does not contain the abolition of any of the tax breaks that President Barack Obama had previously insisted on, that does not mean he will not look for tax hikes, within the framework of the agreement, in the near future.

Deadlock had persisted as the President and the Democrat party had continued to insist that the abolition of selected tax breaks, particularly for the oil and gas industry, should form part of an agreement. As the Republican party rejected such an idea categorically, calling for additional up-front reductions in government spending, they could be seen to have won the argument, but both sides have had to compromise to reach an accommodation.

President Obama has been authorized to increase the debt limit from USD14.3 trillion to up to USD16.7 trillion – less than he wanted - but, at least, an amount that will eliminate the need for further increases until 2013 (and beyond the next Presidential election).

There are to be immediate discretionary spending caps, which will generate nearly USD1 trillion in deficit reduction over 10 years, balanced between defence and non-defence spending. It has been estimated, however, that the consequent spending cuts will amount to only some 0.1% of US gross domestic product. This allowed President Obama to declare that he has been able to “avoid any immediate contraction that could harm the (fragile economic) recovery”.

Enactment of the so-called ‘Budget Control Act of 2011’ will be followed by the establishment of a bipartisan Congressional Joint Select Committee on Deficit Reduction tasked with identifying up to an additional USD1.5 trillion in deficit reduction, which could include spending cuts and, unspecified, tax reforms.

That Committee is required to report legislation by November 23, 2011, and Congress is required, in turn, to vote on its recommendations by December 23, 2011. There is also an enforcement mechanism established to force both parties to agree to balanced deficit reduction, so that, if the committee fails, equivalent spending reductions will be triggered beginning in 2013.

Those further reductions would again be split between domestic and defence spending, but Social Security, Medicare beneficiaries and low-income programs will be protected from any cuts.

Therefore, it could be said that, overall, while the President has not obtained any reductions to the tax breaks, to balance the spending cuts, that he had previously insisted should form part of any agreement, he and the Democrats will get a second chance to make their case during the discussions in the Congressional Select Committee.

Failing that, however, it is also noticeable that the enforcement mechanism and the expiration of the higher-income Bush tax cuts would both occur on the same date – January 1, 2013. Absent what he would call a ‘balanced’ deal, that would enable the President (if he is re-elected) to use his veto to ensure part of the deficit reduction by not extending the tax cuts.

In the meantime, it has been suggested that the real loser from the political deal is business confidence. The unresolved debate over tax reform means, it has been said, that uncertainty remains for the US corporate sector over the future shape of the country’s tax code.

TAGS: tax | economics | business | fiscal policy | law | corporation tax | legislation | United States | tax breaks | tax reform

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