Tax the rich! Raise their rates! Limit their deductions! That seems to be the populist mantra. It’s perpetuated in the press, and there’s some indication that the general public seems to support the idea. Now middle class workers with higher than average incomes seem to be caught up in discussions defining those that are “rich.”
As this applies to tax-exempt organizations, we’re talking about hospital administrators, educators, executive directors of local community and other charitable organizations – people who generally earn a better than average income, yet by no stretch of the imagination do their incomes compare to Warren Buffett’s. And when it comes to the impact on their employers’ retirement plans, shouldn’t the tax structure support retirement readiness for those who have dedicated their careers to giving back to their communities? Read more
After the fiscal-cliff deal, the payroll tax rate – income withheld from our paychecks for social security – went up from 4.2% to 6.2%. For the last two years, American employees were paying a little bit less in social security withholding and the jig was up last week. This rate increase is an effective increase in taxes of about $16 per week (or about $850 per year) for the average American worker.
What does this reduction in income mean for economic growth for 2013? A lot of retailers are concerned that, with less money in their pockets, Americans will spend less. In line with economic theory (taxes increase, demand goes down), many economists forecast that the payroll tax cut will have drag on consumer spending for the year (J.P Morgan expects 0.6% drag on growth, Goldman expects the same drag, Credit Suisse expects consumption spending to move from 2% in Q4 2012 to 1.5% in Q1 2013). We also think the payroll tax cut may have a bit of drag on consumer spending (here and here) in the first half of the year, along with the other changes in tax policy and uncertainty surrounding sequestration and the debt ceiling. Read more
Americans like two things in their entertainment: tense, down-to-the wire climaxes; and sequels. Last night’s resolution to the debate surrounding the so-called fiscal cliff provided both. Several anxious hours after the “official” deadline marking the edge of the fiscal cliff, the U.S. Congress passed legislation to avert the worst of the enormous tax hikes that would have occurred as the Bush-era tax cuts of 2001 and 2003 were set to expire on January 1. The bill made it through the Senate by a vote of 89 to 8 and passed the House of Representatives with a margin of 257 to 167. Overall, the impact of the agreement is slightly friendlier than we anticipated, though still leaves room for a sequel of sorts: two more months of policy uncertainty regarding the spending side of the cliff debate (this will coincide with a likely standoff over raising the government’s debt ceiling too). We’ve written a bit more here, but theses are some of the broad strokes.
Robin Anderson (Economist, Principal Global Investors) also contributed to this post.
With all the back and forth these days in the United States between Democrats and Republicans over the fiscal cliff, it’s hard to see any positives in what appears to be overly partisan wrangling; however, I would propose to you that, right now, we have a better chance for serious policy reform than we’ve had in recent history.
Now, I’m not saying that credible long-term tax and spending policy is the most likely outcome from these fiscal cliff negotiations, but I do believe that we now have an increased possibility of serious discussions that could set U.S. fiscal policy on the right path. Read more
Warren Buffett, the Oracle of Omaha, reiterated his view on a so-called “millionaires tax” in an op-ed piece in the New York Times on Sunday. If you’d like to read about what a billionaire thinks about what millionaires should do, it’s an interesting read.
Here’s a quick summary of his views:
First, in the not so distant past, marginal tax rates for upper income households and tax rates on capital gains and dividends were quite high and – guess what – the wealthy weren’t throwing their money under a mattress, they were investing. Second, the rich should pay their fair share in taxes. Buffett suggests that households with incomes above US$500,000 (not the US$250,000 that Obama has proposed) to return to the pre-Bush era tax rates. And he reiterated his “Buffet Rule,” which calls on Congress to develop a minimum tax for millionaires: 30% for income between US$1 million and US$10 million, and 35% for incomes over US$10 million. Finally, he is, of course, pushing for debt sustainability – moving revenues to 18.5% to GDP and spending to 21% of GDP. Buffet cites that the United States currently takes in 15.5% of GDP in revenue and spending is about 22.4% of GDP.
Another election cycle is over, though with over US$6 billion spent on the various campaigns across the country, the political landscape looks practically the same today as it did yesterday. This, I fear, may be the outcome the U.S. economy could most ill afford at this time. While President Obama’s reelection delivers clarity on a few issues important to the economy, the partisan status quo that remains in Congress likely raises the risk of recession.
First, the clarity. With Romney out of the equation, President Obama’s signature health care reform is probably cemented in place. You can debate the economic impacts of the legislation, but at least businesses and individuals will know that it’s here to stay and can begin forming up plans to adjust to the new health care regime. Next, Fed chairman Ben Bernanke still has a job…if he wants it. Governor Romney had pledged to remove Bernanke from his post when his second term expires in 2014. This probably ensures that Bernanke’s easy-money policies will continue, even if he declines a third term.
What happens when you combine five economists to come up with six economically sensible policy ideas, and then use the result to create a fake presidential candidate? Well, you get what the folks over at NPR’s Planet Money called “A political candidate who could potentially fix the economy, but would never win an election.” Their group of economists came from such vaunted institutions as Harvard, Cornell, George Mason University, the University of Chicago, and the Center for Economic and Policy Research. They were tasked with finding “major economic policies they could all stand behind.” This would then serve as the basis for an economic platform.
So what policies does this Frankenstein’s Monster of a potential POTUS stand on? Five tax changes and one alteration of the criminal code.
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