Americans for Tax Reform is supporting the tax hike prevention legislation on the floor of the House and Senate this week. While not ideal legislation, it accomplishes the primary objective: namely, prevent tax hikes on anyone earning income. Without passage of this bill, everyone who pays income taxes will see their take home pay decline in their first January 2011 paycheck. The good outweighs the bad. Below are specific ATR positions on each portion of the bill:
Prevention of personal tax hikes in 2011 and 2012. Without action, a personal tax rate schedule that currently ranges from 10 to 35 percent would be hiked to a range of 15 to nearly 40 percent. The tax rate at which a majority of small businesses pay tax would rise to nearly 40 percent. The capital gains tax would rise from 15 to 20 percent. The top dividend tax rate would rise from 15 to nearly 40 percent. The marriage penalty would return, and the child tax credit would be cut in half. While we would prefer a permanent solution to these impending tax rate hikes, a two-year tax hike delay is acceptable in this environment.
AMT Patch. Without immediate action, the number of families facing the alternative minimum tax (AMT) would rise from 4 million in 2009 to 28 million in 2010. ATR believes that the AMT should be repealed. A second-best solution is a permanent AMT “patch.” A one-year solution is acceptable in this environment.
Death Tax. ATR believes that the death tax should be permanently abolished. Second-best would have been an extension of 2010 law (no death tax) on a temporary basis. This deal contains a third-best solution: a death tax at a rate lower than what current law (55 percent top rate in 2011) calls for. While this is among the most disappointing aspects of the deal, it is far preferable to the 55 percent, $1 million exemption death tax scheduled for January.
Full Business Expensing. This bill introduces a year of full business expensing in lieu of depreciation. ATR is very supportive of this measure, and thinks it should be expanded and made permanent. Immediate expensing of capital purchases is one of the bedrock changes needed to move our tax system toward a pro-growth consumption base.
Unemployment Insurance. This is the worst part of the package, and evidence that a deal requires each side to get something. This new spending should be offset with spending cuts elsewhere. Unemployment for 99 weeks is indistinct from welfare, and subsidizes non-work.
Payroll Tax Rate Cut. A two percentage point reduction in the payroll tax rate is a minor improvement over continuing the Making Work Pay credit. This is progress.
Personal and Business “Tax Extenders.” ATR does not believe taxes should go up for anyone. Just as we believe the 2001 and 2003 tax provisions should be extended, we also believe that often-passed business and personal tax deductions and credits should also be extended. In many cases, these are horrible tax policy. However, getting rid of them should be done in the context of a comprehensive tax reform bill, not in this tax hike prevention bill. These are not spending measures, and are therefore not earmarks.