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Fiscal Cliff’s Specific Tax Breaks About to Expire

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

From Wikipedia, the free encyclopedia

 Key aspects of the law include:

§                    Extending the EGTRRA 2001 income tax rates for two years. Associated changes in itemized deduction and personal exemption rules are also continued for the same period. The total negative revenue impact of this was estimated at $186 billion.[7]

§                    Extending the EGTRRA 2001 and JGTRRA 2003 dividends and capital gains rates for two years. The total negative revenue impact of this was estimated at $53 billion.[7]

§                    Patching the Alternative Minimum Tax to ensure an additional 21 million households will not face a tax increase. This was done by increasing the exemption amount and making other targeted changes. The negative revenue impact of this measure was estimated at $136 billion.[7]

§                                The above three measures are intended to provide relief to more than 100 million middle-class families and prevent an annual tax increase of over $2,000 for the typical family.[8]

§                    A 13-month extension of federal unemployment benefits.[2][9] The cost of this measure was estimated at $56 billion.[7]

§                    A temporary, one-year reduction in the FICA payroll tax. The normal employee rate of 6.2 percent is reduced to 4.2 percent. The rate for self-employed individuals is reduced from 12.4 percent to 10.4 percent.[9] The negative revenue impact of this measure was estimated at $111 billion.[7]

§                    Extension of the Child Tax Credit refundability threshold established by EGTRRA, ARRA, and other measures.[7] According to the White House, this would benefit 10.5 million lower-income families with 18 million children.[2]

§                    Extension of ARRA’s treatment of the Earned Income Tax Credit for two years.[7] According to the White House, this would benefit 6.5 million working parents with 15 million children.[2]

§                    Extension of ARRA’s American opportunity tax credit for two years, including extension of income limits applied thereto.[7] According to the White House, this would benefit more than 8 million students and their families.[2]

§                                The above three provisions, as well as some other similar ones, are intended to provide about $40 billion in tax relief for the hardest-hit families and students.[8]

§                    An extension of the Small Business Jobs and Credit Act of 2010‘s “bonus depreciation” allowance through the end of 2011, and an increase in that amount from that act’s 50 percent to a full 100 percent. For the year of 2012, it returns to 50 percent.[9] The White House hopes the 100 percent expensing change will result in $50 billion in new investments, thus fueling job creation.[2]

§                    An extension of Section 179 depreciation deduction maximum amounts and phase-out thresholds through 2012.[9]

§                                Together, the above two business incentive measures were estimated to have a negative revenue impact of $21 billion.[7]

§                    Various business tax credits for alternative fuels, such as the Volumetric Ethanol Excise Tax Credit, were also extended.[10] Others extended were credits for biodiesel and renewable diesel, refined coal, manufacture of energy-efficient homes, and properties featuring refueling for alternate vehicles.[9] Also finding an extension was the popular domestic Nonbusiness Energy Property Tax Credit, but with some limitations.[7]

§                    Estate tax adjustment. EGTRRA had gradually reduced estate tax rates until there was none in 2010. After sunsetting, the Clinton-era rate of 55 percent with a $1 million exclusion was due to return for 2011. The compromise package sets for two years a rate of 35 percent with an exclusion amount of $5 million. The negative revenue impact of this provision was estimated at $68 billion.[7][11]

§                    An extension of the 45G short line tax credit, also known as the Railroad Track Maintenance Tax Credit, through January 1, 2012. This credit had been in place since December 31, 2004 and allowed small railroad companies to deduct up to 50% of investments made in track repair and other qualifying infrastructure investments.[12]

       2.  a b c d e f “Tax Cuts, Unemployment Insurance and Jobs”The White House. Retrieved December 17, 2010.

7. ^ a b c d e f g h i j k “Tax Cut Extension Bill Wends Its Way to White House”. Accounting TodayDecember 17, 2010. Retrieved December 17, 2010.

9        ^ a b c d e Dupree, Jamie (December 9, 2010). “Tax Cuts Compromise Package Summary”. The Atlanta Journal-Constitution. Retrieved December 10, 2010.

Graphic View of Wealth Distribution in America

Who Owns What In America?
Imagine lining up everyone in America according to what they own, starting with those who own nothing and continuing down the line to those who own a lot.  Now divide that line of people into five equally long segments.  Each segment would include 20% of the total population, or about 61.7 million people.  Next, add up the total amount of what everyone owns in each segment.  The result is represented by the pie chart below.  The whole pie represents the total wealth in America.  The size of each slice represent the ratio of how much each segment owns of America’s wealth.  The slice of ownership for the poor and working poor are barely visible.  80% of all Americans own just 15.6% of America’s wealth.

The number of people who slipped into poverty in 2010 is an all time high of 46.2 million, so the poorest 20% in terms of wealth ownership includes 15.5 million folks who technically don’t meet the poverty criteria, based on income levels.  The poor essentially own almost nothing.   The working poor own twice of almost nothing.


When I first plotted the distribution of wealth in America in this pie chart it reminded me a little of that Pac-Man character.  The richest Americans own 84.6% of everything while the remaining 80% of us have 15.4% left.  The statistical middle of what I labeled the “Middle America” owns just 4% of America’s wealth assets.

This raises an interest question.  How do we define middle class?  Is Middle America, as I’ve labeled it here the same as middle-class?

No,  We usually define middle class by income levels, not wealth ownership.  As of 2011 the median family income has declined to just over $51,000 per year.  If we were to define middle class based on 10% of families above and below the median income (as I have done here for wealth ownership, the narrow and very low income range would not fit most peoples conception of “middle class”.

But this pie chart displays the distribution of wealth, not income.  It includes all equity ownership in everything from homes to 401K’s, stocks, bonds, businesses, etc.  This chart cannot be directly converted to income levels. There are people with equity but not much income and people with large incomes but not much equity.

However, from a visual perspective the median income (middle most income) will still fall somewhere near the center of the red colored slice, about where the label line is drawn. Individuals in that group made about $26,364 per year, or about $52,000 per household in 2010.  Beyond that it is difficult to superimpose income brackets on this pie chart

This graphic really make clear just how compressed wealth distribution is in America.  Missing from the public dialogue over the past few decades is mention of the working poor.  Politicians and the media seem to focus on the middle class or the poor as if there were no working poor.

The other conclusion I come away with is that there is plenty of wealth here in the still wealthiest nation on Earth.  Telling ourselves that we can’t afford social services for the poor or good public schools or what ever else we desire as a nation is simply not true.  As a nation we can afford a much better society than we have now.

Income Taxes Then and Now – Why All the Fuss?

I came across a 1963 tax return the other day that belonged to a 63-year-old, self-employed tradesman named Edward.  For context, that was the year John F. Kennedy was assassinated.  Historically speaking, it wasn’t that long ago.  In 1963 Edward’s income was $6,806.  He paid $933 in income tax plus $259 in self-employment tax for a total of $1,192 dollars.

My own father was a Sears repairman and my mother a bookkeeper back then.  Together they made around $5,000 and paid about $1,020 in taxes.  But what struck me most about Edward’s income tax return were the rate tables for that year.  The top income listed was only $400,000.  The tax on that was a whopping $313,640 while income over that amount was taxed at a rate of 91% .  Did the rich really pay that much more back then?  (Imagine the stir today if we called for a return to the 1963 tax rate.)

It’s hard to put this into perspective because inflation rose by over 700% since then.  What wondered what these numbers would look like in today’s dollars?  How does the tax rates today compare with the tax rates back then?

The Inflation Adjustment

When we adjust for inflation, Edward made $ 50,247 in todays dollars and paid $8,800 in taxes.  He paid $1,912 in self-employment taxes and $6,888 in income taxes (a 13.7% income tax rate, close to what Presidential candidate Mitt Romney paid in 2010).

My parents, with two children, made $ 36,956 in today’s dollars, and paid $ 7,531 in taxes (a 20% income tax rate).

Someone making only $700 then would make $4,988 in today’s dollars and pay about $28.50 in taxes (a 0.6% income tax rate).

The guy who made $400,000 in 1963 was making $2,850,405 in today’s dollars.  He paid  $2,235,003 in taxes (a 78%  tax rate).  That sounds like a lot, yet it seems the rich in American some how always seem to getting richer.

(Bureau of Labor Statistics Inflation Calculator at: http://www.bls.gov/data/inflation_calculator.htm)

The Tax Rate Adjustment

Today, someone making $4,988 is taxed at 10% , or $49.88,  That’s $16.88 more than in 1963.

Both Edward, and my parents would be taxed at 15% today.  Edward would also pay a 15.3% self-employment tax for a total of  $14,087.  That’s an increase of $5,287 from the ‘63 tax rates.  Edward would pay slightly lower income taxes, $6,384  vs. $6,888, but self-employment taxes rose dramatically.  Since 1963, Edward’s self-employment tax jumped from $1,912 to $7,703.  So much for helping the small business man.

My folks would have to paid $5,344 in taxes at today’s rate, or $1,924 less than the 1963 rate. That’s surprising.  We keep hearing how high our taxes are, yet we are paying less now than we did 46 years ago.

The top income tax rate today is 35%.  President Obama wants to raise the top marginal income tax rate on salaries and other ordinary income from 35 percent to 39.6 percent by letting the extended temporary Bush tax cuts expire at year-end.  The income tax rates on millionaires has already been cut in half for some.  Someone making $2,850,405 pays  $997,642 in taxes at today’s rates.  That is $1,237,361 less than they would pay at the 1963 rate.

(US 2010 tax rates: http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm)

So what’s the point?

America is still a very wealthy nation.  There is plenty of wealth.  We can afford to be a much better country than we are.  When the income tax code was first implemented in 1913 it was intended to tax only people who were financial well off.  Adjusted for inflation, the bottom rate at which a person had to start paying income taxes was about $100,000 in today’s dollars.  It was because the income tax rates weren’t indexed to inflation that income taxes eventually reached the middle and lower income households.  Our financial crisis has a lot to do with the decline of income taxes for the richest Americans.  We are asking those who have benefited most from this great American system to pay a tiny fraction more.  It is hard to see how so much resistance to this small ask is justified.  What’s all the fuss?

Take the Labor Quiz

How much to you know about economic changes in America’s labor force over the last 30 years?  Apart from the occasional new article on Labor Day, few of us give much thought to the extraordinary sacrifices that were required of prior generations in order to bring us the level of comfort and dignity so many of us enjoy today. But the blessing our grand parents and great grand parents fought so hard to bring us are beginning to disappear.  America, once the leader in raising up the middle class, has fallen behind many other advanced nations.  

An article entitled “The Speedup” in the July-August, 2011 edition of Mother Jones, written by Monika Bauerlein and Clara Jeffery, takes a look at this issue.  I created a pop quiz based on some of the facts in the article. Take the quiz to see how well you are doing as an American worker. There are only 7 questions, so it won’t take long.  The answers are below.  If you score very high you should take the afternoon off, maybe.

 

1.      What does the USA have in common with Papua New Guinea, Sierra Leone, Liberia, Samoa and Swaziland?

       a.       We all celebrate the Fourth of July

       b.      Like us, baseball is their national pass-time.

       c.       We are the only six nations on earth that don’t have mandatory paid maternity leave.

 

2.      In the last 30 years, American worker productivity (which can be measured as the amount of work we accomplish per hour) has:

       a.       Declined by 75%

       b.      Increased by 140%

       c.       Increased by over 240%

 

3.      Increased productivity means more company profits since the labor costs per item is lower.  So, given your answer to question number 2 above, in the past 30 years the average overall wages in the US has:

       a.       Decreased by 20%

       b.      Increased by over 50%

       c.       Increased by only 16%

 

4.      Over this same 30 year period, the average income of the top 1% of Americans:

       a.       Increased by 20%

       b.      Increased by 40%

       c.       Increased by over 80%

 

5.     The number of hours everyone works in a given week is something that impacts our family life, and the nations GDP.  Germany has the highest GDP in Europe.  So how many more hours per year (actual time on the job) do American’s work compared to German workers?

       a.       We work 80 hours, or almost two weeks more per year.

       b.      We work 198 hours, or almost five weeks more per year.

       c.       We work 378 hours, or almost 10 weeks more per year.

 

6.      In this current recession the GDP of every nation initially plunged, but no nation was hit harder than Japan.  Japan’s GDP dropped twice as much as did ours.  So when it comes to jobs lost, which nation has the worst unemployment rate?

       a.       Canada

       b.      Japan

       c.       USA

 

7.      One last question.  In 1950 nearly 35% of all wage or salary earners in America were in a union.  What percentage of this group were union members as of last year?:

a.              About 25%

b.             Almost 20%

c.              Less than 15%

 

If you answered each of the above question with option C you are well informed.  Congratulations!   

 

If you didn’t answer C to any of the questions, you really should read the article in Mother Jones. 

In fact, we all need to be better informed so we can come together to restore a measure of economic justice in America.  Here are a few additional details regarding each of the quiz questions:

 

1.      Not only is the US only one of 6 countries that don’t have paid maternity leave, we are one of 16 nations that don’t require our workers to have time off each week.  We are one of only 9 nations that don’t require businesses to offer a paid annual leave.  Every one of our competitor nations provide this for their citizens.

 

2.      While productivity has soared in the last 30 years by over 240%, the real value increase in the minimum wage since 1990 went up by just 21%.  The increase in the cost of living rose 67% since 1990.  Our output of goods and services in most sectors of the economy far outstrips the employment that most of these sectors create. 

 

3.      While income for the wealthiest 1% of American’s rapidly rises every year, the wealth owned by the rest of us actually declined slightly during the Regan years until about 1997.  The increase since then is anemic compared to the enormous amount of wealth created by our great American labor force.

 

4.      The rise in income among the wealthy, as large as it is, pales in compared to their rise in wealth.  The top 20% of the wealthiest Americans today own almost 85% of everything leaving just 15% of the remaining wealth for the rest of us to share.

 

5.      Not only do American’s rack up more time on the clock than our competitor nations (almost 10 weeks per year more than Germany) this doesn’t include the time we work off the clock.  For example, half of us check emails on weekends and 46% of us even check work emails on days we are home sick.  

 

6.      Japan was hit twice as hard by the recession in terms of their drop in gross domestic product (GDP), yet our employment rate dropped more than twice their rate. Canada’s decline in GDP and employment initially mirrored our own (not quite as bad) but today their employment rate is higher than it was before the recession while we are worse off than all our competitor nations.  Mean while, many American corporations are reporting record high profits. 

 

7.      The declining trend in union membership in America is in lock step with the decline of the middle class.   The poor have faired even worse.  Union workers today make about $10,000 more per year than non-union workers, yet the working public would rather trash unions than join one.  The tensions between private sector employees and public sector workers is largely the result of envy by private sector workers who lost higher wages and many of their benefits when they lost their union.  

 

How do you think we are doing as Americans?  Most Labor Day articles remind us of the social battles and sacrifices prior generations have faced to bring a little dignity into our lives. We are doomed to repeat the mistakes of history if we don’t learn from them.  I hope this quiz highlights where America may be headed and prompts you to consider what it will take to save the middle class. This is the real purpose for celebrating Labor, especially on Labor Day.

 

Note:  First published in 2011, little has changed for the better since.