Wednesday, November 10, 2010

A Proposed Solution to the Bi-Partisan Battle Over the So-Called Bush Tax Cuts

Like many Americans, I'm not feeling too optimistic about the partisan power struggles that are already emerging in the wake of last week's elections.  And it's not just a Republican sense of disappointment about not taking control of the Senate or a Democratic sense of disappointment about losing control of the House.  It's something else.  Something more.

It's the feeling of underlying dread which comes with knowing that a mixed legislature and executive branch is just a recipe for complete political, economic and general societal gridlock... which will undoubtedly be capped off by the next round campaign ads featuring each side blaming the other for the stalemate.  We're seeing it already.

If you're interested in working toward developing objective criteria - rather than rhetoric - to resolve philosophical debates over how to pull our trashed economy out of the global gutter... please read on.

What's the Problem?

The next major, knock-down drag-out battle in Congress is already underway: it's over whether to extend the so-called Bush tax cuts of 2001 and 2003. So, let's start there. See the sidebars if you want to read the actual language of both laws.

Briefly, those cuts included: reducing personal income taxes for all income levels, gradually getting rid of the estate tax, reducing dividend and capital gains taxes, eliminating the so-called "marriage penalty" (taxing a couple more for filing jointly than had they stayed single) and increasing the child tax credit, among other things.  If you want to read more on the subject, Forbes offered a summary recently on How Will the Expiring Bush Tax Cuts Affect You? while an article in the Washington Post took a slightly different approach in Five myths about the Bush tax cuts. Of course, you can also Google "Bush tax cuts."  There's plenty out there.

Many of these cuts will go away at the end of this December. (Some are ending in 2012.)  If you've been in a coma or living under a rock and haven't been barraged with the political rhetoric surrounding this issue yet, it goes something like this:

Prior to the election, President Obama offered to extend pretty much all of the cuts except the income tax breaks for individuals earning over $200,000/year or families earning over $250,000/year.  The Obama administration estimated this to be about the wealthiest 2% of U.S. taxpayers and that it would generate roughly an extra $700 billion dollars in revenue a year.  According to the President, the country needs the money to stimulate the economy and the government simply can't afford the price tag.

Republican leaders (not surprisingly) disagreed.  The GOP position countered that the expiring cuts amount to "a job-killing tax hike on small businesses during tough economic times" which would result in those businesses not being able to afford to hire new workers. If small businesses were instead able to hire more new workers, that's what would stimulate the economy.

Of course, the election changed things. The Obama administration now suggests the President might agree to a temporary two-year extension of those high-end cuts.  However, House Republican Leader John Boehner - who is likely to become the new House Speaker next term - repeated his intention again just today to push for a permanent extension when he meets with the President next week.

It may never be possible to truly know whether adding revenue or adding jobs is the only or best way to stimulate the economy.  These two opposing views can shout at each other - and the American public - all they want.  However, rhetoric doesn't prove anything and it's really unlikely to change anyone else's mind.

What's the solution? 

What if there was a way to truly persuade non-believers that continuing to extend tax breaks to the wealthiest Americans is a good idea?  There is: it's called PROOF.

Democrats, at least for the most part, aren't opposed to giving tax breaks to small business owners that actually go out and use the money "saved" by tax cuts to hire new workers.  It's just that there's no PROOF that this is what most - or any - small business owners actually do.  Prove the point and gain the support.

So here's the proposal: any individual/family who makes more than $200,000/$250,000 and wishes to have their tax cut extended simply needs to submit PROOF along with their next income tax returns that they actually used their previous tax breaks to hire however many workers reasonably could have been hired for the amount of savings generated by the cuts.  Check the sidebar for more discussion on how such proof could be established, gathered and evaluated.

For example: an individual owns a small manufacturing business where the salary of a typical worker costs $25,000/year and the owner's income tax returns show a savings of $50,000/year since 2001.  If that individual can demonstrate he or she hired two workers and kept those positions filled for the last nine years, then  he or she would qualify to have that tax break extended for another year.  It's that simple. Put your money where your mouth is.

For small business owners who haven't actually been hiring workers but would like to keep their tax cuts anyway, that's ok.  They can catch up.  Here's how: anyone who agrees to spend an amount equal to all of their previous tax savings during the coming year to hire and keep workers would also qualify to extend their tax breaks for another year.  If they can submit PROOF that they followed through on their promise the following year, all's well that ends well.  If not, the IRS has a year to design a stiff penalty for non-compliance.  I have confidence it will come up with something.

Yes, this is just a basic outline and the idea needs to be filled out. A lot. But let's get the discussion started.

Very wealthy taxpayers may not like this plan, but it's FAIR. It is based on objective criteria and meets the (stated) concerns of both political parties.  Small business owners who really do use tax savings as Republicans suggest would be able to continue to do so indefinitely - which translates to "permanently" - for those who really are creating and maintaining jobs. Republicans get what they want.  Meanwhile, individuals whose wealth comes from other sources and who can afford to pay more as Democrats suggest will do so - instead of forcing the U.S. into deeper debt to China and other countries in order to subsidize that treat.  Democrats get what they want.  Most importantly, Americans get what we all want: governmental leaders that can actually reach a meaningful compromise.

It's unclear how many wealthy taxpayers would qualify to keep their tax breaks under this scenario.  According to Brookings Institution Senior Fellow William Gale in the Washington Post:
If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

And just as most small businesses aren't owned by people in the top income brackets, most people in the top income brackets don't rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses.
That makes some sense.  Think about it.  A quick internet search suggests, for example, that there are between 750-1,000 Major League Baseball players, each of whom earns a minimum salary of $400,000 (and an average salary closer to $3 million).  Likewise, there are roughly 1,700 - 2,500 NFL players, each apparently making a current minimum salary of $325,000.   Even rookies among roughly 430 NBA players pull in a minimum salary of $457,000 per year. And likewise, the 690 NHL players in this country earn a minimum salary of $500,000.  That's 3,570 - 4,620 people who all earn well over the income levels being debated. Add in most, if not all, of the coaches, and the tally is already over 5,000.

And no reason to single out athletes.  There are at least a dozen major broadcast and cable networks in the U.S..  Common experience suggests that each network typically has at least a half-dozen shows in production and each of those shows has at least a half-dozen actors and actresses. Some of the smaller networks might still have a few shows in production at any given time while the larger networks may have much more. Add in news anchors and reporters, sports anchors and reporters as well as weather folks in major and even some mid-size markets across the country, and that's thousands more.  Not to mention movie stars, film producers, directors and so forth.... and that's easily another few thousand.  Then there are the 500 CEOs of the Fortune 500 companies, 500 CFOs and thousands of VPs, presidents, directors and other senior-level managers.  Most if not all of their counterparts at the next 500 on Forbes 1000 list are likely in this salary bracket as well.  And don't forget all of the heirs to the Rockefeller, Carnegie, Mellon, Hilton, Maybelline, Revlon, Johnson & Johnson, Hershey, Kraft, Kellogg and every other fortune in the U.S.  That's many thousands more.

The next question is how many taxpayers are in the top 2%?  According to the IRS website, there were some 144 million filers last year, with about half either receiving a refund or paying no taxes at all.  That leaves about half which do pay federal income taxes, or roughly 72 million.  That's roughly 1,400,000 filers.  If the Republicans are right, then some one million plus small business owners could be able to create or maintain at least one part time position if they are allowed to keep their tax breaks.  This would surely be a boon to the economy that Democrats would welcome with open arms.

But what about the numbers that don't bear out the Republican concerns? Based upon the above admittedly very rough calculations, there seem to be, even by seriously conservative estimates, at least 25,000 - and possibly many hundreds of thousands more - of the wealthiest filers who will not be creating jobs no matter how much more money they pocket in tax savings.  So why shouldn't these Americans kick in more to the community kitty?  After all, "[f]or of those to whom much is given, much is required."  For any wealthy Republicans who might not feel the need to heed the words of former Democratic President Kennedy, keep in mind that's not all you'd be disavowing.  Luke 12:48.

Would implementing this proposal be more time-consuming than simply passing a temporary, blanket extension for all tax cuts?  Of course.  But it's faster than arguing ad nauseam.  It also would be a lot cheaper than shelling out an extra $700 billion/year. And it won't even necessarily increase the size of government.  I'm betting there are a lot of folks out there who would be willing to volunteer their time and talents to get this done. 

So how about it?  If you like the approach described here, please check the sidebars for information on how you - yes, YOU - can get involved.  And please spread the word!