Tax rates to be extended

Matthew Hoy
By Matthew Hoy on December 6, 2010

President Obama announced earlier this evening that he’d come to a deal on extending much of the current tax structure for two years. The deal reportedly includes:

  • The current tax rates for all income levels are extended for two years.
  • The payroll tax is cut by 2 percent for 2011.
  • Unemployment insurance benefits will continue to be set at 99 weeks (nearly 2 years) for the next 13 months.
  • The estate tax returns in 2011, but the base exemption is $5 million and then the rate will be 35 percent. (If no changes had been made then the base exemption would’ve been just $1 million and the rate 55 percent.)
  • Other miscellaneous tax breaks that were part of the temporary “stimulus” bill will be extended.

I just had to smirk at this paragraph in the CNN story on the plan.

As outlined by Obama and sources, the deal would add up to hundreds of billions of dollars in more federal spending or lower revenue in coming years at a time when the president, Republican leaders and a federal deficit commission appointed by the president all say that the growing federal debt must be brought under control.

This is called static scoring. It surmises that if you change the tax rate nothing happens in the larger economy. Businesses don’t grow.  Workers aren’t hired. Workers don’t get raises. Nope, the government loses money. They always apply this sort of “logic” when describing small tweaks to tax rates, but you can bet they’d (rightly) toss it right out the window if the government raised the tax rates by 50 percentage points.

Curiously, there’s no reported deal on capital gains tax rates, which are currently set to rise from 0 percent to 10 percent for individuals in the lowest tax bracket and from 15 percent to 20 percent for everyone else. If those rates aren’t extended, expect to see some profit-taking drive the market down over the next few weeks.

Overall, this isn’t a bad deal. It may be enough to help the economy slightly (though Obamacare still looms large over American business) and benefit Obama in 2012 despite himself. Of course, the two year extension puts taxes back front-and-center for the 2012 election – apparently both sides think that’s to their advantage.

The left is up in arms over the deal – mainly because they really want taxes raised on the rich. It will be interesting to see what happens in the coming days in the House of Representatives, where Nancy Pelosi is still speaker and the Democrats are in control. Surely they wouldn’t vote down “the plan.” (Insert Leslie Nielson joke here.)

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