Sunday, January 02, 2011

The Fine Print of the Obama Tax Cuts

There was a lot of high-fiving in Congress during December. For a legislative body that is suppose to administer the direction of the country - the past year was filled with a lot of purposeful dissemination of misleading (or wrong) information, partisan fighting (not bickering) and downright GOP obstruction. But somehow after the Democrats suffered a complete thrashing in November, this Congress, much to the chagrin of assholes like Steve King and Jim Demint, managed to pass a bunch of important bills and laws.

The hateful and bigoted DADT - gone. The 9/11 rescue workers are finally getting some long overdue (but not nearly enough) compensation. The START nuclear treaty approved and in place. But no bill was as controversial as the gargantuan tax bill that was passed by Congress and signed into law by President Obama. By signing this bill, Obama reneged on his promise of reversing those poorly-timed, ill-conceived and ultimately destructive Bush tax cuts for the uber-wealthy. But the Republicans were in-transient, holding hostage all tax cuts by requiring that the uber-rich continue to receive those favored brackets. As ransom for this tactic, Obama added a couple of breaks and packages for the not-so-wealthy (aka as the people the GOP could care less about). This way the middle class would continue to benefit from the lower rates and everyone could share in the pain of increasing the deficit another $800 billion. All this was done [allegedly] for just two more years.

Be careful what you negotiate for.

The continuation of lower marginal tax rates will bring a lot of smiles to those with high incomes. In addition, the Obama tax cuts (they no longer belong to Bush) also changed some business accounting rules to encourage investment. For those currently on unemployment - a lifeline was extended. And for the middle class, the lower tax brackets will continue to put a few extra shekels into their purses (if they don't get eaten up by the fees the banks will now charge to compensate for limitations in the Financial reform bill).

What is barely discussed anywhere in the media is that this massive treasury give-away (remember we are still paying for an endless, useless and aimless war) does nothing for the long-term unemployed. Those folks - the ones who have used up their 99 weeks of benefits - did not receive one iota of help. Buried in the fine print of the bill is the mathematical certainty that the working poor - those families making under $40,000, the ones that needed this break the most - will actually will pay more in taxes. And finally that the payroll tax holiday for FICA (social security) is most definitely the first nail in the coffin to the end of Social Security as we know it. As the cherry on the sundae - let's not forget that we get to do this all over again in 2012.

I have said from the beginning that I believe this was a really, really bad bill. After reading the tea bags for this bill - we should only hope that is it just bad - my gut is now telling me it will be catastrophic.

First, the unemployment insurance extension is only for 14 months, while the tax breaks are for two years - ain't that a peach for those living on the edge. After 99 weeks of government benefits expires - you are on your own - it's time to find your inner Ayn Rand. And all this has to be renegotiated in 2012 - during the Presidential and Congressional election season. Try talking about higher taxes to a population that thinks every tax increase is just a code word for wealth transfer to Cadillac driving unemployment queens (not for the useless wars, snow removal or police protection). And if the teabag movement gathers anymore steam (aided and abetted by the media, which loves the drama they bring to the screen) - forget about anyone talking higher taxes.

Worse is what this bill does to the lower classes, working poor and Social Security. Part of this bill was a payroll "tax holiday" for those contributing to FICA. The current rate was 6.2% of your pay, up to an income cap of $106,800 (or a max of $6621). For 2011, that rate drops to 4.2% (or $4485). Everyone gets some sort of break, but those earning over the cap will get the full $2136. Let's take a look at the math of this.

Around 12% of the country earns more than $106,800 - so those people will get the full benefit of the holiday. Let's assume 26 paychecks (bi-weekly pay) - that means anyone over the cap gets an additional $82/check. For those making over the "magic" number of $250,000 (the level the tax debate kept deferring to) - they already come home with well over $4500 per check.  That $82 starts to look like a rounding error.

I am not minimizing this amount - for people on the bottom end of the pay scale, every dollar counts. Let's look at it from the perspective of your "average Joe-the-Plumber." The median annual income in the US is just below $50,000. That means this tax holiday will save those families (yes I realize it depends on one/two income families - but I am just trying to simplify things) around $1000 - not chump change. Again at 26 paychecks - those families will see a bump of $38 per check. I am no psychologist - but there is definitely a different mentality in spending/saving when someone receives one check for $1000 versus a stream of payments of $38 over 12 months. My fear is that the $38 (which won't even fill up a car today) - will get lost on lunch, Starbucks, clothing and other assorted non income generating savings. It is easy to deposit $1000 in a savings account/mutual. It is even easier to spend $38 on unnecessary things.

But the administration tell us that the idea of the payroll "holiday" is to get people to buy shit - even if it is only $38. On the macro level it all sounds well and good. The Government estimates that 2% drop in the FICA rate is worth $120 billion - and they also tell us those dollars will go straight into the economy and help create jobs. Keep dreaming. If people use it to pay down debt - (and many people in the lower brackets have way too high debt loads) - well that generates ZERO economic growth. They are just paying for crap they already used. And if we continue to buy cheap crap from overseas - well it will help the unemployment rate -- in India or Taiwan.  Remember the "pre-paid refunds" Congress gave 3 years ago - that $250 check - where was all the benefit?  Until confidence is restored, and people pump up demand naturally and start spending for real reasons (not by plopping $38 into a paycheck) - this payroll tax holiday is nothing more than macro-bubble economics and window dressing.

There is a deep dark side to this payroll holiday. Remember that Americans are like Pavlov's dogs when the bell is rung for tax increases - they bark, complain and vote out the ones who supported an increase.  Let's see how quiet the teabaggers are when this cut is about to expire. Want to bet it gets extended - indefinitely. Which of course means payments into the Social Security trust fund (the one with all the IOUs signed by Ronald Reagan and George W. Bush) will start to be underfunded even quicker. Guess what can of orange pekoe tea worms is being opened? You don't have to be an economist to combine an aging (65+) population, a growing income disparity, an economy that is NOT going to return to pre-2000 employment levels anytime soon and an underfunded Social Security system to see you are creating teabagger paradise - the end of the New Deal - and a lot sooner than they ever dreamed of.

What people should do is take that payroll holiday bonus (whatever amount it is) and automatically invest it in some sort of savings/retirement account - knowing that Social Security is not the third rail anymore. Want to bet that doesn't happen?

Finally - lets look at those working poor. In 2010 any single person earning between $6450 and $75,000 (or two-income family earning between $12,900 and $150,000) was eligible for a $400 ($800) Making Work Pay tax credit. That break is now gone - replaced by the payroll tax holiday. Let's say you are a two-income family that earns $38,000 (which 40% of the households in the country top out at!). Your $800 Making Work Pay credit is gone in 2011, but you now get (thanks to the great negotiating skills of President Obama) the FICA tax holiday - which is worth $760. So at the end of the year - you have a net tax increase of $40! Anyone making less will have an even bigger increase. The break-even point is $40,000. Based on this little math game - over 40% of all American families - the ones with the lowest incomes - will actually pay more in taxes - while those fine folks at $250,000 who are enjoying an additional $2,136 for Ferragamo shoes, Parada bags, Beluga caviar, and Dom Perignon champagne. Want to bet that a good chunk of that aforementioned 40% are teabaggers?

I wonder how many teabaggers bothered to read the bill, do the math - or realize that no matter how angry they get...... well let them eat tea cakes with Asti Spumonte.

Oh - 43.6 million Americans (or 14% of the country) lives below the poverty level - which is around an income of $21,700 for a family of four. In 1980, before the dawn of trickle down your pants tax cuts - that number was 27 million or 12%.  Pretty pathetic for the richest country on Earth.

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  • I have the same bad gut feeling about the omnibus bill, but there just may be a good outcome:

    Revenues will continue to go down, yet there will continue to be no impetus to raise taxes. At the same time, there will be no impetus to lower expenditures on the military and entitlements. The military and entitlements are roughly three-quarters of federal spending. That leaves overhead and outlays, interest and debt, and not much more.

    It is possible - just possible - that we will have to begin to rein in the MIC. If - IF - that happens, it would be an encouraging sign for our furture. Military spending is the one red line in the books that we could easily do without. Only politics maintains the MIC status quo. If our politics are forced to accept that we can no longer afford a military empire, we can easily pay our debts and entitlements and bring the nation back to some good order.


    By Blogger Jersey McJones, at 8:24 PM  

  • sadly i dont think the military will see any substantial cuts - if you think Soc Sec was the 3rd rail - MIC is worse - and if we get more lunatic Republicans in Congress and the White House - then there is ZERO chance of military spending cuts.

    being the world's police is expensive - but it sure makes people feel good. i think it is the biggest waste of money.

    i just think the firms supplying to the MIC are just way too powerful to accept any cuts from Congress.

    that leaves all cuts directed towards Soc Sec and Medicare (discretionary spending - even if cut to zero would barely make a dent in the debt problem)

    so we'll be a safe nation with no people over 65 since they will all be dead from starvation and disease.

    *unless you are rich of course

    dramatic I know - but that is the point - we are just an aimless country with priorities stuck in a John Wayne movie.

    By Blogger Distributorcap, at 9:31 PM  

  • "so we'll be a safe nation with no people over 65 since they will all be dead from starvation and disease."

    So maybe I can finally lose those ten pounds? There's always a silver lining. Of course we'd all be rich if we can get rid of the Liberal agenda, right?

    "we are just an aimless country with priorities stuck in a John Wayne movie."

    Best potential epitaph I've heard yet. But if it weren't for our bloated military, it would be harder for them to claim we're the greatest country in the world - which they incessantly do while insisting everything has gone to hell. I think JW was more consistent than that.

    By Blogger Capt. Fogg, at 11:26 AM  

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