Today, a couple of notable stories about taxes caught our eyes. Taxes will continue to be at the forefront of the economic debate as certain provisions reach expiration. As last year came to a close, the payroll tax cut was the issue du jour. Set to expire at the end of the year, the payroll tax holiday was extended in the 11^th hour in an unsatisfying compromise. The agreement reached only extended the cut for two months, which, of course, means the debate will surface again soon.

Looking ahead to next year, The Wall Street Journal summed up the forecasts of experts to get an early read on what taxes will look like in 2013. Below is a selection of what the experts, “ranging from tax preparers, wealth planners and Washington insiders to professors and former top Treasury and IRS officials,” had to say. Click here to read the full article.

What will be the top rate on income for 2013?
Almost all the experts expect the top income tax rate will remain 35%, perhaps as a result of a one-year extension of current rates, although a few think it could be as high as 40%.

What will be the top rate on long-term capital gains for 2013?
Almost all expect the top capital gains rate will hold at 15%, with two guessing 20%.

When will we know what the 2013 tax rates will be?
Not soon. Nearly all expect the rates won’t be set until December 2012 at the earliest, and possibly well into 2013—although one lone soul thinks Congress could pass a one-year extension of the 2012 rates before the election.

“Whatever the date, it will be late enough to cause chaos for payroll preparers and the IRS,” says Chris Bergin, publisher of the journal Tax Notes.

Will there be fundamental tax reform in 2012?
Not a chance, say the experts. On this point, they were unanimous.

Changing gears, Bruce Bartlett in The New York Times’ Economix blog, takes a look back. The White House recently released new estimates for the tax-gap, the difference between total tax obligations and how much revenue was actually collected. And as Bartlett explains, the numbers aren’t good.

According to the study, in 2006 Americans owed $450 billion more in federal taxes than they paid, an increase of $105 billion over 2001. The I.R.S. estimates that the compliance rate declined slightly to 83.1 percent in 2006, from 83.7 percent in 2001. In other words, people voluntarily pay only about 84 percent of the taxes they owe.

The gap grows a bit smaller when additional enforcement actions are taken. Bartlett goes on to argue that considering tax collections are at an all-time low, the IRS should focus on enforcement as a means to increase revenue and avoid steep tax increases in the future.

While we can sympathize with Bartlett’s sentiment Americans should pay the taxes they owe. This would certainly ease the budget pressure a bit – but this is far from a solution. As we’ve mentioned numerous times before, we have a spending problem, not a revenue problem. Moving forward, Congress must focus primarily on tackling the root of the problem – government overspending.

While national pollsters focus on the presidential horse race, we’re conducting another – highly unscientific – poll of our readers.

Congress is back in session next week.

Last week President Obama announced a plan to cut defense spending

Congress is in the final stages of finalizing an extension to the 2011 payroll tax cut.

Here’s a roundup of this morning’s must-read budget and economic stories:

White House chief of staff Bill Daley is resigning; Office of Management and Budget chief Jack Lew will replace him. The Washington Post has the story.

The Wall Street Journal takes a look at what tax rates will probably look like in 2013.

According to the “Policy Shop” blog, the U.S. lost $3 billion in revenues over the last 10 years due to tax evasion. In an effort to recoup some of the costs, Reuters reports the IRS is reopening a tax forgiveness program for offshore tax evaders.

The Los Angeles Times reports U.S. consumers’ health care spending went up 3.9 percent in 2010.

On the opinion pages: Newsday says Congress should consider President Obama’s defense spending plan while Charles Kadlec argues more stimulus equals fewer jobs.

Congress is back from the Christmas recess, and Barack Obama is back from his vacation, just in time to play kick the can for the seventh time in three years. He is going to ask Congress to raise the debt ceiling another $1.2 trillion, which would take the debt to an excess of $16 trillion.

If the federal government paid all revenues coming in against the debt only, it would take over eight years to pay off the principle. That does not take into account any domestic obligations.

The last I knew about how the Constitution laid out the responsibilities of our country, all spending and taxing had to originate in the House of Representatives, then it goes to the Senate. If there are differences, then the bill goes to a committee to reconcile the differences. Then both chambers vote to pass the bill and send it to the president to sign or veto.

It has been over three years since there was a budget passed by Congress to even send to the president.

According to USA Today, the national debt recently marked a dubious achievement. It is now as big as the entire country’s economy. To clarify, the total amount the country owes is roughly equal to the “value of all goods and services the U.S. economy produces in one year.”

According to the latest estimate in September, GDP was around $15.17 trillion. Forecasts expect that to rise to around $15.3 trillion when the next round of numbers are released. Even still, the national debt will reach the revised number sometime this month.

Economists immediately sounded the alarm. Steve Bell from the Bipartisan Policy Center explained, “The 100% mark means that your entire debt is as big as everything you’re producing in your country. Clearly, that can’t continue.” Mark Zandi of Moody’s Analytics warned this means we have a “grave need to address our long-term fiscal problems.”

As USA Today notes, among advanced economies, only Greece, Iceland, Ireland, Italy, Japan and Portugal have debts larger than 100% of their GDP.

At the core of it, this simply presents an opportunity. Whether the debt is slightly lower or slightly higher than our entire economy, something needs to be done. This mark provides lawmakers a chance to step back and examine just how bad things have gotten. The economy urgently needs a dose of fiscal responsibility. As a recovery flounders and the government continues to spend, the debt will grow at a faster rate than the economy. This is simply unsustainable.

Friday Funnies: 5 jokes about the economy

President unveils new defense strategy

What are GOP presidential candidates missing?

Here’s a roundup of this morning’s must-read budget and economic stories:

USA Today notes that the national debt is now the size of the total U.S. economy.

Roll Call says Republicans oppose President Obama’s defense spending cuts. The Washington Post has more on the President’s proposal.

Roll Call updates readers on the status of negotiations over a final bill to extend the 2011 payroll tax cut.

Politico and The New York Post report on an Alice in Wonderland-themed Halloween party the Obama Administration held in 2009 that went previously unreported.

5

“There’s a plan for the Pentagon to cut almost half a trillion dollars from the military. The Pentagon plans to pay for future wars by divorcing Kobe Bryant.” – Conan O’Brien

4

“2012 is supposed to be the year the world ends. Have you seen the national debt? If the world doesn’t end, we are so screwed.” – Jay Leno

3

“We may lag behind China in manufacturing, but we are the world’s largest producers of hashtags.” – Andy Borowitz

2

“The payroll tax extension passed the House and Senate by unanimous consent. This was a procedural move allowing it to pass, even though most members of congress were already home for the holidays. They weren’t even there! Only 12 people out of 535 were there and they got it done. Imagine how much they could do if we got rid of all of them?” – Jay Leno

1

“President Obama bought about $200 worth of Christmas presents at Best Buy. Then it got awkward when he asked the Geek Squad if they fix economies.” – Jimmy Fallon

This morning, the Bureau of Labor Statistics (BLS) released the Employment Situation report for December. The report shows that the U.S. economy added 200,000 jobs last month with the unemployment rate dropping to 8.5%.

This is a better jobs report than economists had expected. Many forecasted lower job growth with the unemployment rate ticking up slightly as discouraged workers began to look for jobs. The unemployment rate continues its downward trend, dropping from 9.1% in August. Though some of this decline can be attributed to people no longer looking for work dropping out of the labor pool.

BLS explains that “job gains occurred in transportation and warehousing, retail trade, manufacturing health care, and mining.”

Here’s a roundup of this morning’s must-read budget and economic stories:

This morning, the Bureau of Labor Statistics reports that the U.S. added 200,000 jobs in December with the unemployment rate declining slightly to 8.5%.

Yesterday, President Obama unveiled a plan to cut defense spending. The Hill and Politico have the story.

The Washington Post reports the IRS is auditing more Americans who earn more than $1 million a year.

The Associated Press says fears about the European debt crisis are resurfacing.

On the opinion pages: The New York Times praises President Obama’s plan to cut defense spending.

This morning, the President made the short trip from the White House to the Pentagon to unveil a new defense strategy that could save almost $1 trillion over the next ten years. The plan focuses on continuing to move the military into the 21^st century, drawing down ground troops over the next decade and increasing investment in counter-terrorism efforts.

The New York Times explains the plan “refocuses the armed forces on threats in Asia and the Pacific region, continues a strong presence in the Middle East but makes clear that American ground forces will no longer be large enough to conduct prolonged, large-scale counterinsurgency campaigns like those in Iraq and Afghanistan.“

Over the past year, throughout the countless budget and spending discussions, debate over defense spending cuts has intensified. On one side are those that say the Defense Department budget is bloated and shouldn’t be spared from cuts. On the other are those that say cuts to Pentagon spending could leave the U.S. in danger. There is, however, consensus growing somewhere between those two camps – that defense spending can be reigned in carefully, while maintaining a strong national defense.

The President’s plan initially includes the $450 billion in spending cuts he called for earlier this year. What remains to be seen is if lawmakers will allow another $500 billion in cuts triggered by the supercommittee to take effect in 2013. As stated earlier, if both sets of cuts are realized, the savings could reach nearly $1 trillion over the next decade.

We commend the President for his commitment to responsible spending in this area. While we all recognize the cuts should be made deliberately, the national security shouldn’t be used as a shield against fiscal responsibility.

Here’s a roundup of this morning’s must-read budget and economic stories:

The Associated Press, Politico and The Washington Post preview the Obama Administration’s new plan to cut defense spending, to be released today.

National Journal looks at what is coming up for Congress, including Medicare reimbursements to doctors.

The New York Times looks at how difficult it is in the U.S. versus Europe to climb up the income ladder.

On the opinion pages: Tom Ella compares the budgets of certain government agencies to private sector employers

Usually for Wednesday Waste we find an example of hard-to-believe government waste, highlighting the often inefficient ways taxpayer resources are being used. But today, we’re going to change the script a bit and focus on the federal government actually tackling wasteful spending.

This comes from the Government Printing Office (GPO). As The Hill reported late last month, the GPO actually ended 2011 in the black, earning $5.6 million in net income for last fiscal year. In part, the impressive performance was due to the GPO’s survey of Congressional offices, allowing them to decide whether or not to receive copies of documents. It’s this reassessment of age-old practices that the entire federal government could learn from. Just because it’s always been done, doesn’t mean it should necessarily continue. The year-end numbers were also boosted by more aggressive collection of outstanding payments owed by other agencies.

Of course, as we’ve pointed out before, fiscal responsibility often comes with difficult choices. In their effort to get into the black, the GPO reduced the number of employees at the agency – an unfortunate, but cost-saving move.

So, we applaud the GPO for their responsible use of taxpayers’ hard-earned dollars. For too long the federal government has been working under the assumption that spending more than you have is an acceptable operating principle. Other agencies must follow the Printing Office’s example and work to align their costs with the money they have available.

In a January 1 column, the editorial board of the Washington Post came out against several tax subsidies that expired at the end of 2011.  As we pointed out in our handy fact sheet on taxes last year, many tax provisions are disguised as federal spending and such is the case with these provisions.

Specifically, the Washington Post wrote against the infamous 45-cent per gallon tax credit on corn-based ethanol that largely “distorted the global grain market” and “artificially raised the cost of agriculture land,” doing “almost nothing to curb greenhouse emissions.” The taxpayer price tag: $6 billion per year.  Additionally, a $1,000 tax credit for electric car owners to install a 220-volt charger in their homes, which can cost as much as $30,000, expired last week.

For far too long Washington has used the tax code to spend. It’s time for Washington to realize spending in the tax code is the same thing as a direct government subsidy.

Here’s a roundup of this morning’s must-read budget and economic stories:

The New York Times’ “Economix” blog looks at the nation’s long-term debt problems, including payments for interest on the debt.

Bloomberg says critics are attacking Defense Secretary Leon Panetta’s spending reduction measures before they’ve even seen them. Fox News has a preview of Panetta’s plan.

The New York Times has an interactive tool that allows readers to decide how to cut military spending.

On the opinion pages: Addison Wiggin says new taxes and regulations would harm the economic recovery; the Los Angeles Times looks at the next debt ceiling vote; and Nita Ghei asks where the spending cuts are.

Most of today’s news will center on the Iowa caucuses as the Republican presidential candidates maneuver to record a respectable finish. It’s almost certain that most of the candidates will level the blame for the country’s fiscal state against the President and Congressional Democrats. And while Democrats certainly are not blameless, the candidates will be falling woefully short of presenting the entire picture.

Our debt didn’t reach over $15 trillion overnight. Making a habit of running huge annual deficits isn’t a recent phenomenon. Congressional gridlock and its consequences isn’t a one-party game. Governing towards reelection rather than economic recovery transcends part lines. Our economic problems have been decades in the making, developing through numerous Washington power shifts.

The setbacks our economy has suffered over the past year speak more to Washington dysfunction and disconnect than one party’s failed leadership. The inability of Congressional leaders to reach a debt ceiling deal in a timely fashion lead to the country’s first ever credit rating downgrade. Political gamesmanship was at the heart of recent uncertainty over the payroll tax cut and unemployment insurance. The supercommittee was a bipartisan failure triggering automatic cuts – which members of both parties are now exploring how to reverse.

So as the candidates continue to tout themselves as members of the party of fiscal responsibility, we’d contest there seems to be no such thing these days. And the numbers back us up. Click here to see our fact sheet on the GOP’s history of overspending,

Probe reveals feds pressuring agents to rush immigrant visas – even if fraud is feared

By Sarah Ryley Tuesday, January 3, 2012

According to the Associated Press, 37% of adults think the economy will get better in the next year. 24% think it will get worse and 37% think it will stay the same.

When it comes to overhauling the tax code, according to Pew, 44% of adults want minor changes to the federal tax code while 52% want the code to be completely changed.

According to CBS, 1% of adults are enthusiastic about the way the federal government is currently working. 16% are satisfied; 56% are dissatisfied; and 26% are angry.

Here’s a roundup of this morning’s must-read budget and economic stories:

Bloomberg looks at the debt held by the world’s largest economies.

The New York Times reports Defense Secretary Leon Panetta will lay out a plan this week for cutting defense spending.

According to The Wall Street Journal, European leaders will meet later this week to discuss the continent’s economic and debt crises.

On the opinion pages: The Washington Post praises Congress for letting ethanol subsidies expire while The Wall Street Journal is less happy, arguing the “spenders won in 2011.”

One-year Out:  A Closer Look at Sequestration

Click HERE for PDF version

Over the past year, “cutting spending” has become more popular in Washington. When the debt ceiling was raised last August, a provision ensured that spending would be cut even if the “Super Committee” failed to reduce the deficit. Now that the Super Committee has failed and sequestration will go into effect in one year, what is sequestration and will it get the United States’ fiscal house in order?

- Legal Establishment
- What Happens Now Since the Super Committee Failed?
- Conclusion

Legal Establishment

Last August, the President signed the Budget Control Act into law.(1) In addition to raising the debt ceiling, the law slowed the increase of future federal government spending, as outlined in this infographic, by establishing certain spending caps on spending. Additionally, the Budget Control Act established a Joint Selection Committee on Deficit Reduction, also known as the “Super Committee,” to find further cuts in federal spending.

What Happens Now Since the Super Committee Failed?

But Washington failed America because the Super Committee failed to act, which triggered a process called sequestration. What is sequestration? By definition, sequestration makes spending reductions to get budget levels in line with statutory spending goals.(2)

It should be noted that the Budget Control Act technically gives Congress and the President until January 15, 2012, to enact a deficit reduction measure of at least $1.2 trillion over ten years. However, the Senate is not scheduled to resume legislative businesses until January 23, 2012, thus it is virtually certain that the sequestration will be triggered on January 15, 2012, and sequestration will go into effect on January 2, 2013.(3)

- Congress and the President have the ability to amend the sequestration process triggered by the Budget Control Act.(4)

- In fact, there already are talks of amending the Budget Control Act so the sequestration cuts are modified, especially in regard to defense spending.(5)

- Many federal programs are exempted from the sequestration process—some of these exempted programs include Social Security, Medicaid, and federal retirement and disability programs, among others.(6)

Are these really cuts triggered by sequestration?  A look at defense.
It should be noted that half of all of the cuts triggered by sequestration come from defense.  So does sequestration make real cuts to defense?

- Not really. In one scholar’s research, it was determined that “in spite of an initial reduction in 2013…defense spending will continue to grow.”  Accounting for inflation, defensing spending would be flat.

- The scholar determined that, “leaving inflation aside, military spending will grow by about 10 percent as opposed to the 18 percent without the (sequestration) cuts.”(7)

But at least it’s a start.  It will reduce our debt, right?
No. According to the non-partisan Congressional Research Service, the Budget Control Act doesn’t do enough to get The United States’ debt under control. “While the Budget Control Act is projected to reduce the deficit, it does not eliminate budget deficits or growth in the federal debt…” over the next 10 years. Under one projection, over the next 10 years, the deficit is expected to grow an additional $8.5 trillion if the nation continues down its current fiscal path.(8)

A hypothetical example of what might happen since the Super Committee failed:

- The non-partisan Congressional Research Service estimates in one hypothetical example that the failure to enact legislation to reduce the deficit by $1.2 trillion by January 15, 2012, there would be spending cuts of $109.3 billion each year over fiscal years 2013 – 2021.(9)

- In general, for each year, the $109.3 billion in cuts are split equally between defense and non-defense spending. In other words, $54.7 billion of the savings would come from defense spending and $54.7 billion will come from non-defense spending.(10)

- At the end of the day, the non-partisan Congressional Research Service estimates that the automatic trigger would only cut $984 billion in spending over nine fiscal years, FY2013 – FY2021, since Congress is able to account for the savings from reduced interest payments assumed by the sequestration’s deficit reduction.(11)

Where will these automatic cuts come since there was Congressional inaction?

- According to the independent Congressional Budget Office, a large majority of total cuts, 71 percent, would come from reductions in discretionary appropriations. Thirteen percent would come from mandatory spending reductions while the remainder would come from interest payment savings accomplished through trigger’s deficit reduction.(12)

- In general, discretionary appropriations are things that are funded by yearly appropriations bills, such as defense spending and justice spending.

- In general, mandatory spending represents things like Social Security, Medicare, and Medicaid and is funded automatically, outside of the yearly appropriations process.

- Between 2013 and 2021, defense spending would be reduced by $492 billion; nondefense activities would be reduced by $492 billion as well.(13)

- In calculating non-defense reductions, “…a significant portion of mandatory spending…” is exempt from sequestration.(14) Such mandatory spending includes Social Security and Medicaid, among others.(15) 

- One mandatory spending item that would be cut is Medicare. However, the law restricts the automatic cuts for Medicare triggered by Congressional inaction.

- The non-partisan Congressional Budget Office estimates that Medicare would be reduced by $256 billion between Fiscal Years 2013 – 2021.(16)

More on the discretionary spending cuts if there is Congressional inaction:

- As referenced above, 71 percent of all savings resulting from sequestration are projected to come from reductions in discretionary appropriations.

- For these discretionary cuts, across the board cuts would only apply for fiscal year 2013. For fiscal years 2014 – 2021, discretionary spending would be adjusted by further lowering spending caps on discretionary spending, allowing Congress and the President to determine what reductions to make in the yearly discretionary spending process.(17)

Conclusion

The simple fact is that $1.2 trillion in deficit savings over nine years since Congress failed to act and sequestration will be triggered is just a small start. During the last fiscal year the federal government ran a deficit of $1.3 trillion.(18) In other words, in one year the government ran a deficit that is more than all of the savings achieved over nine years through the sequestration process. With the national debt standing at around $15 trillion, many experts have suggested that Congress needs to achieve a minimum of $4 trillion in savings if we want to reverse the current fiscal course of the nation.(19)

Additionally, it is important to note that the effects of the sequestration might not be that meaningful in terms of actually cutting spending. One scholar estimated that over the trigger’s nine-year window, when taken it totality, the savings are achieved by slowing the rate of government spending over time – not by making cuts to spending in dollar terms.(20)

Regardless, since 2010, Congress has continued to moderately chip away at discretionary spending. In the last fiscal year, discretionary spending made up close to 40 percent of all federal spending.(21) And if sequestration goes into effect, discretionary spending with share most of the burden of deficit reduction again.

The simple reality is this: you cannot get this nation’s fiscal house in order if you ignore certain types of spending. Congress must seriously address all spending, including defense spending in addition to entitlement spending like Social Security, Medicare, and Medicaid, because all federal spending should be on the table if we are to get our fiscal house in order.

**************************************

¹ For more information, see our fact sheet on The Debt Limit Compromise at http://www.bankruptingamerica.org/wp-content/uploads/2011/08/Washington-Debt-Plan-Compromise.pdf

² CRS: Budget Sequesters: A Brief Review. March 8, 2004. P. 2.

³ CRS: The Budget Control Act of 2011. August 19, 2011. P. 3. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf and the Congressional Record for the Senate for December 17, 2011.

⁴ CRS: The Budget Control Act of 2011. August 19, 2011. P. 27. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf

⁵ The Los Angeles Times: Congress works to avert defense budget cuts. October 25, 2011. http://articles.latimes.com/2011/oct/25/nation/la-na-defense-supercommittee-20111026

⁶ CRS: The Budget Control Act of 2011. August 19, 2011. P. 31. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf

⁷ Mercatus:  Defense Spending Excluding War Funding. December 5, 2011. http://mercatus.org/publication/defense-spending-excluding-war-funding.

⁸ CRS: The Budget Control Act of 2011: Effects on Spending Levels and the Budget Deficit. September 16, 2011. http://www.aau.edu/WorkArea/DownloadAsset.aspx?id=12708. P. Summary.

⁹ CRS: The Budget Control Act of 2011. August 19, 2011. P. 30. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf

¹⁰ CRS: The Budget Control Act of 2011. August 19, 2011. P. 30. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf

¹¹ CRS: The Budget Control Act of 2011. August 19, 2011. P. 30. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf

¹² CBO: Testimony of Douglas W. Elmendorf on Discretionary Spending. October 26, 2011. P. 17. http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf.

¹³ CBO: Testimony of Douglas W. Elmendorf on Discretionary Spending. October 26, 2011. P. 15. http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf.

¹⁴ CBO: Testimony of Douglas W. Elmendorf on Discretionary Spending. October 26, 2011. P. 15. http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf.

¹⁵ CBO: Testimony of Douglas W. Elmendorf on Discretionary Spending. October 26, 2011. P. 4. http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf.

¹⁶ CBO: Testimony of Douglas W. Elmendorf on Discretionary Spending. October 26, 2011. P. 15. http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf.

¹⁷ CRS: The Budget Control Act of 2011. August 19, 2011. Pp. 3-4. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf

¹⁸ CBO: Monthly Budget Review. November 7, 2011. http://www.cbo.gov/ftpdocs/125xx/doc12541/2011_Nov_MBR.pdf

¹⁹ PBS Report: Super Committee Urged to ‘Go Big’ on Deficit Cuts. November 1, 2011. http://www.pbs.org/newshour/bb/politics/july-dec11/committee_11-01.html

²⁰ Mercatus: Federal Spending Without & With Sequester Cuts. http://mercatus.org/sites/default/files/publication/fed-spend-without-with-sequester-chart-analysis_0.pdf

²¹ CBO: Testimony of Douglas W. Elmendorf on Discretionary Spending. October 26, 2011. P. 1. http://www.cbo.gov/ftpdocs/124xx/doc12490/10-26-DiscretionarySpending_Testimony.pdf.