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Obama Adamant On High Income Tax Rate Hikes

by Mike Godfrey, Tax-News.com, Washington

29 November 2012


While other lawmakers in the United States are looking to develop a solution to avoid the "fiscal cliff", which could involve the elimination of tax breaks used by the wealthy, as well as spending cuts, a new report from the White House merely repeats President Barack Obama’s warning of the economic effects of raising middle-class tax rates.

A new White House report from the National Economic Council and Council of Economic Advisers therefore provides an analysis of the impact on retailers and consumer spending if Congress fails to avoid taxes going up for those taxpayers with annual earnings of less than USD250,000 – “98% of American families and 97% of small businesses” – by the end of the year.

“If Congress doesn't act,” the White House states, “middle-class families will see their income taxes go up on January 1. The typical middle-class family will see their taxes go up by USD2,200 next year, negatively impacting businesses and retailers across the nation.”

The report calculates that the effect of letting the Bush tax cuts expire for those middle-class individuals and families, and failing to patch the alternative minimum tax, could reduce consumer spending, which constitutes about 70% of the economy, by 1.7% in 2013 and, thereby, cut US gross domestic product by 1.4%.

Due to the increased tax rates, it is estimated that consumers would reduce their expenditure in 2013 by nearly USD200bn less than they would have, with housing, utilities and healthcare being the hardest-hit areas.

While the President confirms that he is committed to working with Congress “to reach compromises on areas of disagreement”, there is, he says, “no reason to delay acting where everyone agrees: extending tax cuts for the middle-class. There is no reason to hold the middle-class hostage while we debate tax cuts for the highest income earners.”

The Democrat-led Senate has already approved a bill to do the President’s bidding. However, Republican lawmakers, while they are obviously not against maintaining the other Bush tax cuts, are looking to negotiate a complete package, rather than agree to single measures immediately – an overall compromise that would contain an increase in tax revenue (which would have previously been off-limits for all Republicans), but without the tax rate hikes for those earning over USD250,000.

Nevertheless, the President has reiterated, at every opportunity, that he will not sign an extension of those high-end Bush tax cuts. He remains unconvinced that sufficient revenue can be found from closing some or all of the tax deductions, exemptions and credits that are still available for those earning higher incomes, that would, at least, balance that lost from extending their Bush tax cuts.

Despite his doubts, there have been suggestions as to how the figures could stack up. For example, the Committee for a Responsible Federal Budget recently presented alternative ideas for how to raise the required amount of income exclusively from high-earners, including a USD25,000 cap on itemized deductions phased in for incomes between USD250,000 and USD500,000, a cap to limit the value of certain tax preferences to the lesser of 2% of income or USD10,000 for people making over USD250,000, or a limitation on the benefit of itemized deductions to 28%.

Furthermore, on being asked what the President’s priorities should now be, a recent Gallup poll has 70% of Americans favoring a reform of the tax code that lowers all tax rates and eliminates deductions and exemptions, while 72% asked for major cuts in federal spending. Only 47% called for an increase in taxes for those earning over USD250,000.

TAGS: individuals | tax | small business | economics | business | fiscal policy | law | gross domestic product (GDP) | tax credits | tax rates | United States | tax breaks | individual income tax

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