Thursday, December 09, 2010

The Income Tax Rate / Unemployment Legislation

Earlier this week President Obama worked out a compromise with Senate Republicans on ending the Republican filibuster on extending the Bush-era tax cuts and unemployment benefits.

Austan Goolsbee, Chairman of the Council of Economic Advisors, again takes to the White House White Board to explain what it would mean.

The President also recorded a video explaining why he thinks this is a good compromise.

Here is a description of the legislation as sent from the White House:

Highlights of the Framework

· Extending the 2001/2003 Income-Tax Rates for Two Years. The framework would end the impasse over taxes by extending the 2001/2003 income tax rates for two years and reforming the AMT to ensure that an additional 21 million households will not be hit with a tax increase. These measures provide relief to more than 100 million middle-class families.

· Key Administration Priorities to Support Job Creation and Economic Growth. In addition to the 2001/2003 rates, the Administration secured several provisions that are vital for our economy’s growth, which would not have been possible without this potential deal.

o An About 2% Employee-Side Payroll Tax Cut: The agreement includes an about 2%, employee-side payroll tax cut for over 155 million workers – providing tax relief of about $120 billion next year.

o Extension of Unemployment Benefits: The framework extends emergency unemployment benefits at their current level for 13 months, preventing an estimated 7 million workers from losing their benefits as they search for jobs.

o The Child Tax Credit: The $3,000 refundability threshold established in the Recovery Act for the Child Tax Credit will be extended under the framework, ensuring an ongoing tax cut to 10.5 million lower-income families with 18 million children.

o The Earned Income Tax Credit: The framework continues a Recovery Act expansion of the Earned Income Tax Credit providing up to $630 for families with 3 or more children, and reduces the “marriage penalty” faced by working married families. Together, these enhancements to the EITC will help 6.5 million working parents with 15 million children.

o The American Opportunity Tax Credit: The new American Opportunity Tax Credit – a partially refundable tax credit that helps more than 8 million students and their families afford the cost of college – would be continued under the framework.

o 100 Percent Expensing: The framework agreement includes the President’s proposal to temporarily allow businesses to expense 100% of their investments in 2011, potentially generating about $50 billion in additional investment in 2011.

A number of businesses, industry groups, newspaper editorial boards (including the Philadelphia Inquirer) and others have come out in favor of the legislation.

Here are my thoughts: Initially I was very much against this legislation but having watched the video of the President explaining it, and watching the Goolsbee video I have come to accept the positive aspects of it. One continuing reservation is that by reducing the payroll tax it will be almost impossible to return it to current levels which could have lasting negative implications for Social Security. I would be more in favor of the payroll deduction decrease if there were an increase in the income that is taxed for Social Security. Right now income above a certain number (I think it is $106,000) is not taxed for Social Security. Lower the tax percentage and raise the limit and then I'd be more in favor of it. But keep in mind that am ill-informed on economic matters.

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