As the battle continues in Washington over how to avert a default on the government’s debt obligations, the possibility of imminent tax increases seems to be fading.
The plans advanced Tuesday by House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, R-Nev., both avoid any immediate tax increases (see Obama and Boehner Present Dueling Debt Plans). The Boehner plan is reportedly being sent back to the drawing board for revisions after it fell flat with some of his fellow House Republicans in the wake of a Congresional Budget Office analysis. The CBO found that the plan would not cut spending anywhere near as much as originally advertised. Instead of slashing $1.2 trillion over 10 years, it would reduce the deficit by about $850 billion.
Some members also objected to the establishment of a bipartisan congressional commission that is supposed to produce a list of an additional $1.8 trillion in savings that would have to be enacted into law before the debt ceiling could be raised further. They fear that might open the door to recommendations for future tax increases.
Republicans are not happy with the Democratic plan advanced by Reid either, even though it too contains no tax increases and meets Boehner’s original demands for a measure that would lift the debt ceiling with equivalent spending cuts. Reid’s plan would rely in part on projected savings from ending the wars in Iraq and Afghanistan, which seems to be a safe bet as the U.S. continues to draw down its forces, at least in Iraq. This premature peace dividend assumes, though, that we won’t get further entangled in foreign conflicts, which is never certain.
For now, then, there is still a stalemate in Washington, with the August 2 deadline for raising the debt ceiling rapidly approaching.
Boehner has preferred not to use the term “tax increases” in describing the deal that he came close to agreeing on with President Obama before walking away from negotiations twice. Instead “revenue increases” is the term that gets bandied about the most. Exactly how that differs from “tax increases” is unclear since the specific details of the “grand bargain” that Obama hoped to seal with Boehner have not been disclosed. It has been assumed that the term is basically a euphemism for “tax increases,” though Boehner has vociferously denied that he would agree to a plan to raise taxes. So then, the question remains how the goverment would be able to raise revenues without raising taxes.
A few theories have been advanced. For example, the corporate repatriation tax holiday that multinational companies have been lobbying Congress to pass would supposedly bring an estimated $1 trillion in foreign profits back to the U.S., where they would be taxed at a reduced rate. The Obama administration has been cool to the idea so far, though, saying that the last time a tax holiday was tried on foreign profits back in 2004, companies used most of the money to buy back shares and offer dividends to investors instead of creating jobs.
However, the extra money would provide some tax revenue. Exactly how much isn’t clear. One of the bills introduced in Congress would lower the tax rate on those profits from 35 percent to 5.25 percent. If some of those profits eventually would have been repatriated anyway at the maximum tax rate over the next 10 years, the net effect could be a reduction in revenue over the long term, but a quick boost in revenue during the year of the tax holiday.
Another possibility for revenue increases would involve increasing the IRS’s enforcement powers in some way. That would mean giving the IRS the authority to chase after the elusive “tax gap” of undeclared and unpaid taxes, estimated at between $290 billion and $345 billion back in 2001. One way to do that might be with greater authority to detect tax fraud, or higher penalties when tax cheats are caught. However, with the House Republican budget actually proposing to cut the IRS budget, it would be more difficult for the IRS to expand its enforcement efforts. Plus, the last big attempt to expand the IRS’s tools by requiring businesses to file 1099 forms to report any transactions totaling $600 or more with other businesses was widely unpopular and ultimately got repealed by Congress.
Revenue increases could occur through the expiration of the recently extended Bush-era tax rates, which are now due to expire at the end of 2012. Whether or not that's going to be allowed to happen is sure to be a hot topic during the 2012 Presidential campaign. Obama has pledged not to raise taxes for people making less than $250,000 a year, while Republicans have pledged not to raise taxes for anybody. The outcome is as uncertain as the outcome of the next election.
The question of whether or not the expiration of temporary tax cuts would technically be considered a violation of the pledge not to increase taxes attracted fresh scrutiny last week. Grover Norquist, whose influential lobbying group Americans for Tax Reform asks politicians to sign such a pledge and then holds them accountable for any violations, initially told the Washington Post that allowing tax cuts not to continue technically would not violate the pledge. However, Norquist soon backed away from that dispensation when supporters reacted in disbelief.
Probably the best hope for revenue increases in the next 10 years would be for the economy to expand. As the country slowly emerges from recession, that seems like a real possibility. A number of states and cities have seen their tax coffers bounce back in the past year as a result of the improving economy. The main threat to the economy right now, in fact, appears to be the possibility of a default on the government’s debt obligations. If that happens, the major credit rating agencies have warned they would have to lower the rating on U.S. Treasury bonds from the current AAA level that they enjoy.
That would mean higher interest rates on not only the national debt and future government borrowing, but probably also for consumers and businesses that needed to borrow or pay off their credit cards. With more money going to pay off interest on debt instead of buying things, investing in new projects, and hiring people, there is a risk of further damage to the economy and a return to where we were in 2009.