While Washington continues to struggle with attempts at major changes to the federal tax system, individual states have no such problem. Many states in the South and Midwest that have single-party legislatures and are Republican-controlled are seeking to do away with the tax filing of state income taxes in favor of higher and more diverse sales taxes.
With 37 of the 50 states having single-party control of the legislature and governorship, seemingly radical projects such as tax reform can be handled much easier than in states that struggle with the need for a middle ground between parties. Of those 37 states, 25 are Republican-controlled, and it is primarily these states that are considering doing away with the tax filing of income taxes and replacing the lost revenue with higher sales tax and sales tax on previously untaxed items such as food and luxury services.
Much of this shift being considered is not grounded in new ideas, but rather comes partly from the idea of trickle down or supply chain economics, popular during Reagan’s presidency and still somewhat popular with Republicans today. Critics of the move from income taxes to higher sales taxes are concerned that the shift will place too much of a burden on the poor and middle-class. However, proponents point out that placing sales tax on services would also tax higher income groups as well.
Proponents of this idea also state that eliminating income taxes at the state level would spur economic growth for everyone. In addition, it has been proposed that states with lower income tax burdens continually outperform higher tax states. However, other studies have claimed to show that the opposite is true, using the relative economic strength of higher tax states like New York as an example.
The President has claimed that the Tuesday night fiscal cliff deal will reduce middle class taxes in America. However, taxes for most Americans will increase in 2013. The tax relief that has been built into the package will add nearly $4 trillion per year for the next 10 years to the existing $16 trillion debt. The fiscal cliff deal passed by the Senate and the Congress will not stop the Social Security payroll tax cut from expiring. This means that more than 75 percent of American households will face a higher federal tax liability in 2013.
Tax Policy Center’s analysis indicates that families with annual income between $40,000 and $50,000 will have to pay $579 extra middle class taxes in 2013. For those earning between $50,000 and $75,000, the liability will increase by $822. Individuals earning more will have to shell out higher taxes. The Bush era tax rates for individuals earning less than $400,000 and couples earning less than $450,000 have been extended. Those earning more will pay tax at a higher rate.
The highest tax rate will increase from 35 percent to 39.6 percent. Those who fall in the highest tax bracket will have to pay a higher rate of investment taxes at 20 percent. Obama’s health care law could also increase the tax outflow of high income families. Investments of individuals earning more than $200,000 per year and couples earning more than $230,000 per year will attract a new 3.8 percent tax.
According to Tax Policy Center, families with annual income between $500,000 and $1 million will have to pay $14,812 extra tax in 2013. Those earning more than $1 million will have to shell out an additional $170,341. Obama tried very hard to include the payroll tax cut for 2011 and wanted to extend it through 2012. However, Democrats and Republicans were not keen and both agreed to let the cut expire.
Wages as high as $113,700 pay a 12.4 percent Social Security tax. Employers pay half and workers pay the other half. The latter’s share was cut from 6.2 percent to 4.2 percent for 2011 and 2012. This will result in middle class taxes savings of about $1000 a year.
The fiscal cliff Congressional battles have just begun. Over the next few weeks, fiscal cliff agreements relating to debt ceiling and automatic spending cuts affecting the Pentagon will be hammered out. Democrats will continue to push for tax hikes while Republicans will demand spending cuts and entitlement reforms.
Lost in the politically generated issue of Mitt Romney’s taxes is the issue of Harry Reid and his own tax information. Harry Reid has jumped up and donned a fool’s mantle once again, and this time with a wild claim by an anonymous source, that Mitt Romney has not paid taxes for the last ten years. Less ridiculous would be if Reid held a press conference to say that he has spotted UFOs in the Nevada skies. Harry Reid is accustomed to playing with fire and getting burned, but the Nevada Democrat cannot seem to stop picking up matches and lighters.
Now the Republican party is attacking Reid, with Republican Party Chairman, Reince Priebus, saying that Reid was a dirty liar, and Republican Senator Lindsey Graham saying that Reid is making things up. On top of that is a rising murmur among conservatives that Harry Reid should release his own tax records before he accuses other people. Reid has said that he does not make much money as a senator, but the records are released each year. This is false on two fronts. As of 2010, Harry Reid was listed as being worth ten-million dollars. While certain financial records of his are released each year, those are the cherry-picked records. Reid has never had a full tax disclosure, and refuses to release all of his records to this day.
Any person possessing common sense would know that anybody with the kind of fortune that Mitt Romney has would be swarmed by the IRS at the first hint of impropriety. The Democrats ask a simple question which sounds logical at first blush. They want to know if Romney has nothing to hide, then why will he not release his tax records. It would be interesting if Mitt Romney were to call a press conference and declare that one of Harry Reid’s mistresses has said that she has witnessed Reid beating his wife on numerous occasions. He could add that the mistress will not identify herself, but if Reid is not a wife beater, he should come forward and prove it. Of course the reason Romney does not release his records is that if those records found their ways into the Democrats’ desperate paws, they would be able to twist the numbers in any creative way they wanted to suit their purposes. Harry Reid’s spokesman, Adam Jentleson recently said that this tax issue is the biggest issue of the campaign. Given the state of his party’s jobs record, he had better hope so.
On Monday, leadership of the House GOP announced its intention to support an extension of payroll tax cuts through the end of 2012. This, of course, will affect 2012 taxes. The GOP plans on offering its support without insisting on offsetting cuts or including unrelated policies in the bill. This bill will likely pass well before its deadline without much argument, which is something that has not happened in Congress for quite a while.
Democrats and Republicans aren’t completely happy with the extension of payroll tax cuts deal, however. The bill is more of a backup plan to keep the tax cuts in place for 2012 taxes while Congress wrestles with other issues. Ongoing negotiations include discussions about unemployment insurance and offsets.
There are a number of reasons for the unconditional offer. One is that the Democratic party holds the upper hand on this issue by accusing the GOP of hurting workers who are already hurting financially. There is also evidence that eleventh hour negotiations on fiscal policy helps no one and Americans are getting tired of these types of games. It could also be a tactical move. The GOP may think that if they give a little on this issue, they will be in a better position to push through challenges to Medicare reimbursement rates or to stop unemployment insurance extensions. It could also be a combination of all of these reasons.
Even with GOP support, extension of payroll tax cuts is not set in stone. It may not have the support it needs from conservatives or the Democrats might not support the bill if it does not have a provision for extending unemployment insurance. Even so, it is remarkable that the unconditional offer was even put on the table.