(CNSNews.com) – With massive tax increases waiting in the wings for American taxpayers when the Bush tax cuts end in 2010, the Obama administration and Congressional Democrats will soon turn their attention to taxes.
The director of the White House Office of Management and Budget, Peter Orzsag, will host a “fiscal responsibility” summit Monday with congressional Democrats and others, in an effort to highlight the administration’s upcoming efforts to reform government health-care entitlements and bring a modicum of balance to the federal budget.
Part of the discussion is sure to include the impending tax increases set to hit every American taxpayer when the Bush tax cuts expire in 2010, unless Congress acts to extend them. During the presidential campaign, then-Sen. Barack Obama pledged to repeal the tax cuts.
“I want to eliminate the Bush tax cuts,” Obama told CNN’s Wolf Blitzer in a May 2008 interview.
Obama also said, in a June 2007 Democratic debate at Washington, D.C.’s Howard University, that repealing the Bush tax cuts would help pay for universal health care and other social programs he envisioned.
“The Bush tax cuts -- people didn't need them, and they weren't even asking for them, and that's why they need to be less, so that we can pay for universal health care and other initiatives,” Obama said.
Enacted in 2001, the Bush tax cuts reduced the income tax rate for all taxpaying Americans, as well as rates on capital gains and stock dividends.
The tax cuts are set to expire in 2010 unless Congress renews them, meaning their expiration would amount to an across-the-board tax increase for Americans who pay income taxes, roughly 60 percent of the country.
But unless Congressional Democrats act to prevent it, every income tax bracket will rise, with the lowest tax bracket experiencing the largest increase – jumping from 10 percent to 15 percent of income.
Those who pay no income tax at all will see a reduction in benefits provided by refundable tax credits, a form of social spending.
The 2001 tax cuts increased the amount of the Child Tax Credit that is refundable – money which can be earned even if no income tax is owed – to $1,000. Unless Congress extends the tax cuts, low-income families will only be able to get a maximum of $500 per child.
Another tax set to rise in 2010 is the capital gains tax, which will rise from 8 percent to 10 percent for those in the 10 percent tax bracket. For everyone else, capital gains taxes will rise to 20 percent.
Capital gains are profits made on investments when those investments are sold. Investments that can incur capital gains taxes include stocks, bonds, real estate and financial instruments, like securitized debt.
An increase in capital gains taxes could prove controversial, given the slumping real estate and financial markets, because it could make selling homes or securities more difficult, due to the higher real cost caused by the higher taxes.
The tax rate on dividends is also set to rise in 2010. Currently, dividends are not taxed for those in the 10 percent tax bracket and are taxed at 15 percent for investors in every other tax bracket. Barring congressional action, dividends will be taxed as normal income – at the newly raised rates.
Allowing the Bush tax cuts to expire will ironically revive the controversial estate tax, which is set to be eliminated in 2010. Known by some as “the death tax,” this provision places taxes on large inheritances, regardless of whether they are inherited through a will or simply passed on when someone dies.
Advocates of the death tax say, if it returns to force, it would only affect estates worth $1 million or more. But opponents criticize it because the tax can often encompass ordinary farms, small businesses and other long-time family-held properties that are worth $1 million or more on paper, but are not really part of the large inheritances that were the original target.
Congress could act to extend or make permanent the Bush tax cuts and prevent taxes from rising, however, that will make balancing the budget and paying for Obama’s planned healthcare reforms nearly impossible, according to Roberton Williams, senior fellow of the Tax Policy Center – a joint project of the Urban Institute and the Brookings Institution.
“It makes the problem a lot harder if you don’t let revenues rise,” Williams told CNSNews.com “Because if revenues can’t go up other than with the growth of the economy, then you have to rely entirely on spending cuts to balance the budget.”
Cutting spending to balance the budget is unlikely, Williams explained, because spending has grown far too fast, prohibiting Congress from cutting enough social programs to bring the budget back down to Earth.
“If we just look at the trend in spending, it doesn’t look like it’s feasible to undue the growth enough to be able to use spending cuts as a means of balancing the budget.”