Part III: Plan B

Economic-RecoveryPart III: Plan B

Yesterday, Speaker John Boehner introduced a “Plan B” approach to addressing the Fiscal Cliff.  As the December 31, 2012 deadline approaches the President and the Speaker’s teams are negotiating an agreement to keep the nation and our economy from going over the looking “fiscal cliff.”

The Speaker’s Plan B proposal seeks to avoid tax hikes on individuals with incomes over $200,000 and family households over $250,000.  Below are bullets of what Plan B offers as well as estimates of what it would mean.

The Tax Proposals in Plan B would:

  • Raise $300 billion from high-income households;
  • Provide households with incomes over $1 million a tax cut averaging $50,000 per year;
  • Be less than $400 billion in high-income revenue compared to the Senate middle-class tax cuts bill;
  • Make current estate tax levels permanent;
  • Raise taxes by an average of $1,000 on 25 million working families with children and students because it doesn’t continue the American Opportunity Tax Credit or improvements to the Child Tax Credit and Earned Income Tax Credit;
  • Discontinues tax incentives for business, like the Research & Development credit, energy incentives, and temporary measures like bonus depreciation.

Consequences of Moving To Plan B Include:

  • The $300 billion raised in Plan B is less than one third of the initial Republican offer and based off preliminary estimates that show it is $400 billion less than what would have been raised by repealing all of the 2001/03 tax cuts for incomes over $1 million;
  • 0.3 percent of households making over $1million would get tax cuts averaging $50,000 because they would get a tax cut on their first million rather than the first $250,000 and avoid reductions in tax benefits due to the Personal Exemption Phaseout (PEP) and the Itemized Deduction Phaseout (Pease) provisions.  The average tax cut for households with incomes between $200,000 and $500,000 would be $360;  (see Table Below)

Income Group

Average Annual Tax Cut Relative to the President’s Approach

Share   of Additional

Tax Cuts

Below $200,000

$0

0%

$200,000-$500,000

$360

6%

$500,000-$1 million

$11,000

25%

Above $1 million

$50,000

69%

Estimate of what the tax cuts mean by income bracket based on the President’s Plan.

  • Seventy percent of the $400 billion lost by increasing the expiration threshold from $250,000 to $1 million compared to the Senate bill would go to households with incomes over $500,000;  that number grows to ninety percent when including incomes between $250,000-$500,000
  • Leaves in place a sequester (budget cuts) that threaten education, research, and national security;
  • Pushes 2 million Americans off unemployment insurance benefits starting in January;
  • At Christmas time, Plan B would cut off benefits for 2 million workers searching for jobs, something Congress has never done before when unemployment was still 7.7%;
  • Cuts reimbursements for doctors seeing Medicare patients by 27 percent;
  • 70 percent of the $400 billion lost by increasing the threshold from $250,000 to $1 million would go to households making more than $1 million.  More than 90 percent would go to households with incomes over $500,000;
  • Provides a tax cut of $1 million per estate for the wealthiest 3 in 1,000 estates, all valued at more than $7 millio  n per couple. Would spend $120 billion over the next 10 years on additional tax cuts for the wealthiest 3 in 1,000 estates. The large majority of that amount would be spent on the 1 in 1,000 estates valued at more than $5 million.
  • Less than 0.5 percent of the benefits of Plan B would go to business and farm estates valued at less than $5 million: The Tax Policy Center estimates that only 40 businesses or farms in the entire country that are valued at less than $5 million would owe any estate tax under the President’s proposal. Less than 0.5 percent of the additional tax cuts under the Plan B estate tax plan would go to these farms and businesses.
  • Raises income taxes on 25 million middle-class families making less than $250,000 by an average of $1,000 apiece. This includes:
    • College: Eliminates a tax incentive for college education for 11 million families, raising their taxes by an average of $1,100.
    • Child Tax Credit: Reduces the refundability of the child tax credit for 12 million working families, raising their taxes by an average of $800.
    • Earned Income Tax Credit: Eliminates the increase in the EITC for larger families and increases the EITC marriage penalty, together raising taxes on 6 million families by an average of $500.

Plan B would not continue critical tax incentives for businesses and doesn’t extend key provisions that Congress routinely passes with strong bipartisan support, such as tax credits for clean energy and the Research and Development Tax Credit.

These incentives would not be available in 2012 or 2013 under Plan B.  In addition, it would not extend the 50 percent bonus depreciation that was in effect in 2012 and is a cost-effective temporary measure to support investment and growth. Plan B also:

  • Does not address other elements of the fiscal cliff that include the expiration of emergency unemployment insurance benefits, the Sustainable Growth Rate (SGR) for Medicare or the sequester (across the board budget cuts). In addition, it does not do anything for jobs, or significant deficit reduction;
  • Would mean 2 million Americans will lose their emergency unemployment benefits in January because it doesn’t extend emergency unemployment insurance (UI) for Americans looking for jobs.
  • A 27 percent cut in doctor’s pay in Medicare.  Plan B doesn’t fix the Sustainable Growth Rate formula (SGR) or “doc fix,” continuing uncertainty for doctors and patients.  Doctors will face a payment cut equal to $14 billion.  This would jeopardize the care for 50 million people with Medicare;
  • Keeps the nation on course to default our debt, heightening uncertainty for businesses and families.
  • Does not replace the defense sequester, which includes a 9 percent across-the-board spending cuts which amounts to about $500 billion in cuts;
  • Leaves in place the 8 percent cuts for non-defense discretionary spending, which would impact research and education.  The Office of Management and Budget (OMB) forecast that the sequester would cut domestic non-defense spending by about 8 percent.  This would mean:
    • About 100,000 children would lose access to Head Start;
    • Some 10,000 special education teachers and related staff would be out of jobs;
    • Close to 700,000 women and children would lose the nutrition assistance they need;
    • And research and development would have about 700 fewer new grants from the National Institutes of Health and up to 1,500 fewer grants from the National Science Foundation.
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Part II: The Fiscal Cliff

It keeps rolling downWhat is the Fiscal Cliff?

The term was first used by Federal Reserve Chairman Ben Bernanke to emphasize that without a change in current laws by the end of 2012, the economy and the nation could go back into a recession.  The Congressional Budget Office (CBO) estimates that with no deal and if the current tax and spending cuts occur, the country will plunge back into recession in early 2013.

The picture of the economy going over a cliff on January 1, 2013 may not be the best description.  In fact, some analysts believe it would be better to call the looming crisis a “fiscal slope” or “fiscal hill” instead, because the cumulative effects of what will happen with no agreement is more like the economy moving slowly uphill instead of going over a cliff.

The reality is our nation’s economy is healing but not healthy yet.  Our current economic crisis brings to mind the lesson of futility illustrated by the Greek king Sisyphus.  Sisyphus was condemned for his greed to roll a boulder up a hill over and over. Each time he reached the top of the hill, it rolled back down.  Similarly, just as our economy is righting itself, it is plunged into a “fiscal cliff” situation that could send us right back into recession.

You may recall, during the presidential campaign, former Governor Mitt Romney said the deficit grew faster under President Obama than any other president.  What he did not add is spending kept the country from going further into recession.  Stimulus spending, extending tax cuts, unemployment benefits, saving the auto industry, bailing out the banking and housing industries, funding two wars and extending tax cuts cost a lot of money.  And now, not spending  and increased taxes may take us right back into recession.

The “fiscal cliff” discussions are about past agreements, in particular, an agreement made last August during the budget debates on the debt ceiling.  If no deal is made the budget deficit will be cut nearly in half.  But tax hikes mean less money in family households, a decline in spending, 2.2 million will stop receiving unemployment checks and the unemployment lines will grow longer because businesses will be forced to lay off workers.

The agreement made last year by the US Congress will save the government $1.2 trillion dollars over the next ten years, but could lead to serious economic implications in the short run that will dwarf the savings.  If no agreement is made here’s what will happen:

  • The Bush tax cuts that were extended by President Obama in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will expire meaning everyone’s taxes will increase on January 1, 2013.
  • Spending cuts called “sequestration” to most discretionary programs will be made as directed by the Budget Control Act of 2011, that will significantly cut the budget deficit by 1.2 trillion dollars over the next ten years;
  • The nation will go back to the Alternative Minimum Tax thresholds from 2000 tax year levels;
  • The Medicare Sustainable Growth Rate that were extended by the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA) will expire;
  • The 2% Social Security payroll tax cut, extended by MCTRJCA will expire;
  • Federal unemployment benefits extended by MCTRJCA will expire affecting 2.2 million Americans.
  • New taxes from the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will go into effect that will tax families making over $250,000 a year and individuals making over $200,000 a year.

Why protect the middle class?

Annually American families buy goods, services, automobiles, furniture, and as mentioned earlier during the holiday season, gifts and food.  This year, Americans will spend nearly $5 trillion on retail sales.  One fifth of that activity occurs during the holiday season.  Tax cuts will impact this portion of the economy.

Accordingly, the retail industry supports through employment 15 million Americans and has since June 2009 when the recession ended, been responsible for more than 9 percent of overall employment growth adding over 400,000 jobs over the past 32 months.  Raising taxes on the middle class would impact the number of jobs, because with less income, middle class consumers will spend less money on retail.  The President’s Council of Economic Advisors (CEA) tax increases will mean that nearly $200 billion less will be spent in 2013.

Keep in mind, that the median family income in 2011 was $50,054, down 1.7% from the previous year and worse down 8.7% from 2007 just before the recession.

Below are examples of what could happen if tax cuts end for an average middle class family of four in 2013.

Example 1: A married couple with two children earning between $50,000 and $85,000.

  • The child tax credit will fall from $1,000 to $500 meaning this couple instead of claiming $2,000 will only be able to claim $1,000.
  • See a tax increase of $900 when their income is merged from the 10% tax bracket into the 15% tax bracket
  • An increase of approximately $300 because the marriage penalty relief will expire.
  • Total tax increase = $2,200

Example 2: A single mother with three children 11 months to 6 years of age, working full time at minimum wage with an annual income of $14,500.

  • Tax increase of $1,725, because the Child Tax Credit will go from $1,000 to $500 per child.
  • Tax increase of $670 because the EITC expansion for larger families will expire.
  • Total tax increase = $2,400

Example 3: An upper income married couple with a 15 year old at home and a 19 year old in second year of a public university.  The couple’s income is $120,000.

  • Tax increase of $700 because they will be unable to claim the $2,500 American Opportunity Tax Credit that helps with college expenses and only able to claim $1,800 of the Hope Credit.
  • Increase of $500 because the Child Tax Credit mentioned above in Example 1.
  • Tax increase of about $900 because of the merging of the 10% tax bracket.
  • Tax increase of $2,400 with higher marginal rates and the expiration of the marriage penalty relief that allows for a larger standard deduction.
  • Total Tax increase = $4,500

taxgraphic_fiscalcliff

For more information on this graph visit: http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/14/how-the-fiscal-cliff-will-affect-your-taxes-in-one-chart/

For more information you can visit these and other sites 🙂

http://smallbusiness.foxbusiness.com/finance-accounting/2012/12/17/what-falling-off-fiscal-cliff-means-for-employers-jobs/

http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm

http://en.wikipedia.org/wiki/United_States_fiscal_cliff#Projected_effects

http://taxfoundation.org/sites/taxfoundation.org/files/docs/median_family_fiscal_cliff_large.png

Part I: Defining the Middle Class

Blog_Chart_2_-_top_10_percent_us_income_share_into_three_groups

 

 

 

 

Every day news reports say our country’s economy is heading toward the “fiscal cliff” unless the Congress and the President strike a deal.  Americans are aware of it, but many are not sure what fiscal cliff means.  I have asked taxicab drivers, teachers, attorneys and other members of the middle class, what is the fiscal cliff?  Many say they know it’s coming, but are unable to explain it.

The President continues to say that he will not sign a deal that will burden the middle class.  But who is the middle class and how do they fit into the debate on the fiscal cliff?  Within the broader term “middle class,” there are the following sub-groups, stratified by income and characterized by educational attainment and employment.  And while there are different perspectives and analysis of the middle class, below is a breakdown by Investopedia of the American income classes.

As you read, keep in mind that the US Census Bureau reported the 2011 median household income of American families as $50, 054.  This is down 1.5% from 2010 and down 8.7% from 2007, the year before the recession.  Median family household income last year was $62,273 down 1.7% from 2010.  These numbers are significant, because as you read below, these numbers fall in the area of the middle class.

The middle class is a significant portion of the US population that keeps American businesses growing, the government operating and the American way of life vibrant.  While the fiscal cliff is relevant to each and every American’s way of life, recognizing who the middle class are and their role in America is important to know before delving into Part II “The Fiscal Cliff.”

(From Investopedia “Which Income Class Are You”)

The Income Classes
The Upper Class
At the top of the income classes is the upper class, also known as the 1% or as the 5% because this class makes up about 1-to-5% of the entire American population. However, some sources state that as much as 15% of the American population could fall into the upper class. These households make approximately $150,000+ a year (the 5%), or over $250,000 a year (the 1%), and can be divided into two different categories: those with old money or those with new money. Households with old money are those that have had wealth  in their family for at least two generations (sometimes many more), and haven’t had to necessarily work for an income. On the other hand, households with new money consist of households who have had wealth in their family for only one or two generations, and instead of inheriting their riches they worked hard to earn their wealth.

The Middle Classes
Next come the middle classes, which make up the vast majority of the American population, and at the top of the middle class is the upper middle class, also known as the top of the class. Members of this class tend to be well educated, hold post-secondary degrees and have high-paying, white-collar positions. This class is male-dominated, and has an income of $100,000 or more annually. That’s enough to stay at the top one-third of U.S. incomes .

In the middle of the middle classes is the lower middle class. This class usually has households with people who have a college education, but these people don’t have the degrees necessary to advance into higher-earning positions. This class contains lower-level, white-collar workers who generally earn between $32,500 and $60,000.

The lower middle class can be split into two different categories: the satisfied middle and the struggling middle. The satisfied middle can still find satisfaction and positivity in their lives, despite their modest incomes, and include a disproportionate amount of young and old, but no middle-aged adults. The struggling middle, however, contains households that actually earn “a lower median family income than Americans who put themselves on the lowest rungs of the social ladder,” and have a disproportionate amount of women and minorities, enabling them to have a lot in common with the lower class.

At the bottom of the middle classes is the working class, also known as the blue-collar class or as the anxious middle. This class is the most dissatisfied and downbeat of the middle classes, and don’t have as much education, meaning that they may have gone to college, but have more technical or vocational training. They are also usually paid by the hour, and have a variety of jobs, including: police officer, truck driver and factory worker. Salaries in this class fall between lower middle class and the poverty level, with a range of $23,050 to $32,500.

The Poverty Level
The bottom of the classes fall into the poverty level, and includes any American household that falls under the poverty line, meaning that they don’t earn enough money to meet their basic essentials of life, such as food, clothing and shelter. The Census Bureau estimates that about 15% of the U.S. population (approximately 42 million people) live below the poverty line, and fall into this class today. The current poverty level is estimated to be any household of a family of four earning between $18,000 and $23,050 per year. However, this figure has often been a hot topic of discussion, because many poor people also live in urban areas that have a high cost of living, meaning that they need to earn more if they want to survive.

Read more: http://www.investopedia.com/financial-edge/0912/which-income-class-are-you.aspx#ixzz2EsHmKQ7o