‘It is not a sensible way to run a country to have this magnitude of tax issues left to annual uncertainty,” said Treasury Secretary Tim Geithner earlier this month, and he’s certainly right about that. But at the current moment the single biggest obstacle to more certainty is his boss, President Obama, who still refuses to compromise on the tax increase set to whack the economy in a mere 30 days.
After meeting with Congressional leaders yesterday, Mr. Obama dispatched Mr. Geithner and budget director Jacob Lew to negotiate a deal. Yet the President is still holding out against even a temporary extension of the 2001 and 2003 tax rates. Republicans won 63 House seats running against those tax increases, but Mr. Obama still seems under the spell of the dead enders led by soon-to-be-former House Speaker Nancy Pelosi.
The magnitude of the looming tax increase ought to snap him out of this hypnosis. If the Democrats who still run Capitol Hill for another month fail to act, tens of millions of American households will see their paychecks shrink immediately in the New Year.
OpinionJournal.com Columnist John Fund on the tax debate within the Democratic caucus, and on the fight for key committee chairmanships in the House.
Capital gains and dividend tax rates will climb to 20% and 39.6%, respectively, from 15%, and the top two income tax rates will climb to 38% and 41% (including deduction phaseouts), from 33% and 35%. The typical family with an income between $40,000 and $75,000 a year will pay as much as $2,000 more in 2011, as the 10% tax rate bracket and the $1,000 per child tax credit vanish.
This could have been resolved months ago, except that the White House and Congressional Democrats insist that some taxes must be raised. Mr. Obama wants the lower rates to expire on incomes of $200,000 for individuals and $250,000 for couples. Dozens of Democrats revolted against that in the campaign, so the latest gambit, courtesy of New York Senator Chuck Schumer, would raise that threshold to $1 million.
Republicans shouldn’t be suckered into raising taxes on anyone, especially not on small business job creators. The U.S. corporate tax rate of 39% (a combination of state average and federal rates) is already about 15 percentage points above the international average, and for the first time in a generation the personal rate of 41% would rise above the average of our overseas rivals. That’s all before the 3.8% surtax on investment income arrives in 2013, courtesy of ObamaCare.
Because most nations tax their companies at a business rate lower than the personal rate, the Tax Foundation says the Obama plan would mean that many Subchapter S corporations in the U.S. would pay “virtually the highest tax rates in the world on their business income.” In other words, the after-tax rate of return on investment in the U.S. would fall relative to investing in Europe or Asia. This is an invitation to outsource more jobs. The U.S. should be cutting tax rates to become more competitive, as President Obama’s deficit reduction commission and tax reform advisory panel have recommended.
