Congress Failed to do its Job

Although we are 162 days into the fiscal year, the federal government still does not have an approved budget. Just… incredibly frustrating.

CNN reports:

As school kids know, Congress has the responsibility to appropriate funds for the government to spend. It's right there in Article 1 of the Constitution. But this year -- and let's not mince words -- lawmakers have fallen down on the job.

"This is a measure that indicates they [lawmakers] are not doing well," said Julian Zelizer, a professor of history and public affairs at Princeton University. "Polarization in Congress is so extreme, and this reflects the difficulty lawmakers face in making decisions."

Of course, short-term spending bills are nothing new. Congress has enacted at least one every year for all but three of the past 30. But five in one year? How did it come to this?

President Obama first proposed a budget for fiscal year 2011 on Feb. 1, 2010. That was 404 days ago.

If the process worked as designed, Congress would have taken a look at the president's suggestions. Lawmakers on the budget committees would have set target spending levels, and appropriations committees would have hammered out spending plans to fit.

Read more here

MSNBC Calls Out Congressmen Sleeping in his Office

Do you think Lawrence O'Donnell was justified in suggesting the GOP Congressman was a tax criminal? Let me know, Twitter.com/RoniDeutch.

Hat Tip: TaxProf Blog

Congress Urged to Raise Debt Limit

Economists are warning that Congress must allow the country to borrow more to avoid a debt default that would wreak havoc on financial markets and imperil the U.S. economy. Apparently both Democratic and Republican leaders in Congress agree that the debt limit must be increased. At last! Bipartisan agreement!

From Reuters.com:

Threatening not to raise the $14.3 trillion debt ceiling -- the amount of debt the country is legally allowed to issue -- is "like playing with fire," Democratic Senator Charles Schumer said on NBC's "Meet the Press."

"If we didn't renew the debt ceiling ... We might permanently threaten confidence of the credit markets in the dollar, which could create a recession worse than the one we have now or even a depression," he said.

Republican Senator Tom Coburn also predicted a dire outcome if lawmakers were unable to reach an agreement to put the country's fiscal house in order.

"If in fact the bond vigilantes come after the government bonds in the next two to three years, we will have such bigger pain than not raising the debt ceiling," Coburn said on the same television program.

The Obama administration is under pressure to put a cap on spending to curb its $1.3 trillion budget deficit. Coburn said he thought he would vote in favor of raising the debt ceiling only if there was a specific amount of spending cuts on the table.

Continue reading here

TIGTA: IRS Refuses to Take Steps to Cut Down on Prisoner Tax Fraud

The Treasury Inspector General for Tax Administration (TIGTA) released a new report about fraudulent tax returns from prisoners. TIGTA calls out the IRS for failing to take action on the tens of thousands of fraudulent tax returns filed by people who are currently incarcerated. While average taxpayers are being hounded for innocent mistakes, the IRS is just letting prisoners commit fraud without doing anything. This is simply absurd.

Check out a snippet from the report below.

The IRS has not shared prisoner tax return information with Federal and State prison officials to help combat tax fraud by inmates. ... The Inmate Tax Fraud Prevention Act of 2008, signed October 15, 2008 and amended in July 2010, provides the IRS with the authority to disclose information on prisoners who have filed a false tax return to the head of the Federal Bureau of Prisons and State departments of corrections. The law also requires TIGTA to provide Congress with a report on the IRS’s progress in sharing prisoner tax information.

TIGTA found that the IRS had not provided any information on prisoner returns to either the Federal Bureau of Prisons or State Departments of Corrections as of October 2010. Prison officials told TIGTA that receiving Federal tax return information on prisoners would help reduce both tax fraud and other illegal activity....

TIGTA also found that the IRS may have understated the amount of prisoner tax fraud in a 2009 report to Congress. In that report, the IRS identified 44,944 false/fraudulent prisoner tax returns during Calendar Year 2009. However, the IRS’s report was limited to only those tax returns the IRS identified and chose to evaluate for fraud. TIGTA identified 540,984 tax returns that were filed by prisoners in 2009, of which 54,410 were not identified by the IRS as having been filed by a prisoner.

In addition, TIGTA found that the process used by the IRS to compile its annual file of individuals in Federal and State prisons lacked managerial oversight to ensure accuracy and reliability. Even though the prisoner file is the IRS’s single most effective tool to identify potentially fraudulent prisoner tax returns before refunds are issued, key data in the 2009 prisoner file were inaccurate and/or incomplete.

Hat Tip: Tax Prof Blog

Congress OK’s Stripped-Down Spending Bill

Last night the Senate approved a funding bill to keep the government functioning into March. A few hours later the House also passed the legislation and sent it to the President's desk to be signed into law.

Boston.com reports:

On a 193-to-165 vote, the House backed a stripped-down measure that would freeze pay for federal employees, provide $160 billion for the wars in Iraq and Afghanistan, and head off cuts in Pell grants for college tuition. The Senate approved the bill hours earlier, 79-16.

Excluded from the measure were thousands of proposed pet projects known as earmarks, and provisions opposed by the White House that would have prevented a trial on US soil of Khalid Sheikh Mohammed, the alleged mastermind of the Sept. 11 attacks who is being held at the detention facility at Guantanamo Bay, Cuba.

The bill goes to President Obama, who was expected to sign it before midnight last night, when a lack of funds would have forced a government shutdown.

The measure is needed because the Democratic-controlled Congress — in an unprecedented breakdown of the budget process — has failed to pass a single one of the 12 annual spending bills that fund the day-to-day operations of every federal agency.

The spending bill is expected to protect, at least temporarily, a large defense contract funding a jet engine that would be partially built in Lynn, Mass. General Electric, which makes the backup prototype engine to the F-35 Joint Strike Fighter, said the program would provide up to 400 jobs in Lynn.

Read more here

Dems: Tax Cut Package Will Kill Social Security

Is the tax deal the beginning of the end of Social Security? Some Democrats in Congress sure think so.

The Hill.com reports:

Rep. Peter DeFazio (D-Ore.), who voted against the legislation, said on Thursday that “this [vote] is the beginning of the end of Social Security.”

“Next year Republicans are going to want to continue to undermine Social Security, and we are not going to be in any position to borrow the money under whatever new rules the Republicans adopt to make it whole,” he said.

Rep. Jim McDermott (D-Wash.) told The Hill that the tax bill -- which passed the lower chamber on Thursday night -- is a “trojan horse” designed to kill the Social Security program.

“My view is this is like the magician. He has got people looking at the estate tax. Meanwhile, he is putting his hand in your pocket and taking your Social Security,” McDermott said.

In the tax bill that the White House hailed on Friday as a "big win," workers will get a two-percent tax break for one year on their payroll taxes -- a tax that funds Social Security. The cut will leave Social Security with a $112 billion short fall. To make up the difference, the government will need to borrow the money.

Proponents of the bill contend the payroll tax holiday will provide a significant boost to the economy.

Read more here

51 Million, Mostly Lower-Income, will do WORSE Under New Tax Law

According to Consumer Reports.org, the new tax bill passed by Congress last week will actually take more money from paychecks of individuals making less than $20,000 and households making less than $40,000. How is that possible? Read on to find out:

That's because the Making Work Pay credit, a temporary tax credit that's been in effect for the past two years, is going away as of January 1. That credit provides up to $400 per individual, $800 per household, for all eligible workers. And it adds more to the pockets of households making between $20,000 and $40,000 than the new, 2-percent drop in the Social Security payroll tax.

Why is the payroll-tax cut not as beneficial to those workers? Because at lower income levels, a 2-percent decline doesn't add up to much.The Tax Policy Center, a non-profit, non-partisan research organization, estimates that 51 million households, including many making $40,000 or less, would do worse under the new law. (On the Tax Policy Center's table illustrating that point, see the fourth column from the right, in the row labeled "All," for the total number of households benefiting more from Making Work Pay than from the Social Security payroll tax cut; the number is in thousands, so add three zeros to it.)

With the Making Work Pay tax credit, individuals between $6,452 and $75,000, have been eligible for up to $400 a year. Couples making between $12,903 and $150,000 have received up to $800. But, as Roberton Williams, a senior fellow with the Tax Policy Center, points out, the 2-percent drop in the payroll tax doesn't yield $400 until a worker makes $20,000. So workers making less won't get as much under the new system.

To confirm the TPC's assertions, I checked with both Barbara Weltman, a tax attorney and author of J.K. Lasser's 1001 Deductions and Tax Breaks, and John W. Roth, a senior tax analyst with CCH Wolters Kluwer, publisher of tax information and software. Both agreed with the TPC's assertion. "The net will be a negative for the lower working class," Roth said.

Read more here

House Passes Legislation to Extend Only Some Tax Cuts

On Thursday the House of Representatives passed legislation to extend some of the expiring Bush-era tax cuts. 234 members voted for the bill, while 188 voted against it. The legislation now heads to the Senate, where it is expected to struggle. When are we going to see a final decision?!

The Hill.com reports:

Twenty Democrats broke with their party and voted against the bill after 33 had defected in a previous test vote. Most of those who voted with Republicans on the first ballot were members of the centrist Blue Dog Coalition, and many lost their bids to be reelected last month.

Speaker Pelosi gaveled the vote to a close herself, receiving a smattering of applause from Democratic members. The bill extends only the cuts for the middle-class, letting tax breaks end for families earning more than $250,000 per year and individuals making more than $200,000. Congress originally authorized the cuts in 2001 and 2003.

Three Republicans, Walter Jones (N.C.), Ron Paul (Texas) and John Duncan (Tenn.), voted with Democrats to renew only the middle-class cuts.

Read more here

The Blur Between Spending and Taxes

While Congress is getting back to work, and deficit reduction is a high priority, there’s a lot of rhetoric being bandied about. Spending cuts and tax cuts are a big focus. But what does it really mean? The NY Times tries to deep dive to see what the big difference really is.

From NYTimes.com:

Should the government cut spending or raise taxes to deal with its long-term fiscal imbalance? As President Obama’s deficit commission rolls out its final report in the coming weeks, this issue will most likely divide the political right and left. But, in many ways, the question is the wrong one. The distinction between spending and taxation is often murky and sometimes meaningless.

Imagine that there is some activity — say, snipe hunting — that members of Congress want to encourage. Senator Porkbelly proposes a government subsidy. “America needs more snipe hunters,” he says. “I propose that every time an American bags a snipe, the federal government should pay him or her $100.”

“No, no,” says Congressman Blowhard. “The Porkbelly plan would increase the size of an already bloated government. Let’s instead reduce the burden of taxation. I propose that every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.”

To be sure, government accountants may treat the Porkbelly and Blowhard plans differently. They would likely deem the subsidy to be a spending increase and the credit to be a tax cut. Moreover, the rhetoric of the two politicians about spending and taxes may appeal to different political bases.

But it hardly takes an economic genius to see how little difference there is between the two plans. Both policies enrich the nation’s snipe hunters. And because the government must balance its books, at least in the long run, the gains of the snipe hunters must come at the cost of higher taxes or lower government benefits for the rest of us.

Jobless Benefits Cost so Far: $319 Billion

According to a CNN Money analysis of federal records, unemployed Americans have collected $319 billion in unemployment benefits since the recession began three years ago. This number is likely to be the center of a debate to extend benefits for the fifth time this year. But just as important, in 2009 alone, those payments kept 3.3 million people from poverty. Congress must act on unemployment before the end of this month or 2 million taxpayers will begin losing benefits.

CNN Money reports

The federal government has already footed $109 billion of the bill, and lawmakers are super-sensitive to adding further to the deficit. But advocates are turning up the pressure to extend the deadline to file for federal benefits.

Regardless of what Congress does, employers big and small will be paying the tab for years to come.

Businesses traditionally cover the cost of state unemployment insurance and up to 20 weeks of federal benefits, which kick in when a state experiences high levels of joblessness. At issue now are a third level of emergency benefits -- lasting up to 53 weeks -- first authorized by Congress in mid-2008.

Soaring unemployment has drained the state accounts that typically fund jobless benefits, forcing many states to borrow money from the federal government to cover their payouts. Currently, 31 states have $41 billion in loans outstanding.

Read more here

Tax Cut Timing is Proving Problematic for Democrats

From NY Times.com:

When one party controls the White House and Congress, it controls the calendar for what gets done and when. So how is it that Democrats ended up in such a fix over what to do about the expiring Bush-era tax cuts?

That is what many Democrats are asking.

By dint of calculation and miscalculation, after mixed messages and missed signals, President Obama and Congressional Democratic leaders delayed debate until before the midterm elections. They dared Republicans to fight for extending the tax cuts for the rich and, in so doing, “hold hostage” those for the middle class. But it was Democrats who blinked as their ranks splintered in the heat of a worsening electoral climate, and they delayed any vote until after the elections.

Now, with the tax cuts due to expire Dec. 31, the debate finally commences next week in a lame-duck session, with Democrats weakened, Republicans emboldened by the election results and the tepid economy continuing to provide some argument against letting rates rise even for the highest income levels.

For every election since the Bush tax cuts became law in 2001 and 2003, a central plank of Democrats’ campaign platforms has been to repeal them for high-income brackets — to pay for other programs, like expanded health care, or to reduce budget deficits.

Is this the Tax Reform Obama and the New Congress can Agree on?

The mid term elections are over and both President Obama and Congress are going to have to decide on a few tax laws in the next few weeks. Earlier today Reuters published an article bringing attention to a non-partisan tax proposal from Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire, that many expect the President and Congress to consider.

The proposal would simplify income tax rates for individuals and businesses, and change laws so that businesses could immediately write off capital investments. It would also raise capital gains tax rates, but would reduce the federal budget deficit, while reducing the average family's tax liability by around $4,000.

Reuters reports:

President Barack Obama’s bipartisan deficit commission has a mandate to cut the U.S. budget gap. But the White House panel may surprise in another area: tax reform. Democrats and Republicans are taking a hard look at a plan that would simplify the code and cut corporate taxes. Although not perfect, it would be a big improvement.

Much of the public focus on the commission, which is expected to vote on any recommendations it makes next month, has been on its efforts to slash spending. Two areas that could suffer the knife are tax breaks and Social Security, analysts say. But panelists are also assessing ways to reform America’s labyrinthine tax code to promote economic growth, and thereby more tax revenue to help pay down the debt.

Smartly, members won’t recommend a total scrapping of the current system in favor of some ideal tax code concocted by academics. No politically unfeasible value-added or flat taxes here (though a flat consumption tax would be ideal). Instead, they’re examining a plan devised by politicians — Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire and panel member — that uses the current system as a baseline and then tweaks it a whole lot.

The Wyden-Gregg idea mostly succeeds. For individuals, it would reduce the number of tax rates from six to three and dump the alternative minimum tax. It would also combine several existing government savings plans into one. For business, Wyden-Gregg would combine multiple rates, including a 35 percent top rate, into a flat, 24 percent corporate rate. Small businesses could immediately write off capital investments. And companies could only deduct part of their interest payments, making equity financing more competitive. All great, great stuff.

There are some downsides, which is to be expected of a plan meant to win votes on both sides of the aisle. It would raise the top capital gains tax rate to 23 percent from 15 percent (not counting what happens with the Bush tax cuts or the new Obama Medicare tax). It would also subject the foreign income of U.S. multinationals to immediate taxation. Most advanced economies tax only income earned domestically.

Read more here

Obama: End Tax Breaks to Stop Overseas Hiring

From Google News:

President Barack Obama is renewing his call for Congress to close tax breaks that reward some U.S. companies with overseas subsidiaries, a proposal that has raised concerns among some lawmakers in the president's own party.

In his weekly radio and online address, Obama said the tax breaks encourage companies to create jobs and profits in other countries.

"There is no reason why our tax code should actively reward them for creating jobs overseas," Obama said. "Instead, we should be using our tax dollars to reward companies that create jobs and businesses within our borders."

At issue is a bill that stalled in the Senate last month that would end some tax credits and deferrals for U.S. companies for operations overseas.

Though Obama singled out Republican opposition, the bill also failed to get support from some Democrats, including Senate Finance Committee Chairman Max Baucus, D-Mont., who expressed concern that change would put the U.S. at a competitive disadvantage.

The ending of the tax loopholes has been opposed by business groups, including the National Association of Manufacturers.

Obama said that while companies that conduct business internationally do make an important contribution to the U.S. economy, it doesn't make sense to grant them tax breaks when companies at home are struggling to rebound from the economic crisis.

No Cost-Of-Living Raise This Year For Seniors

Although the Social Security Administration has informed Congress that they will not make an official announcement about cost of living increases until later this week, experts are widely expecting the agency not to recommend any adjustment to benefits. The administration has to wait until after October 15th to make a final decision so they can review the September Consumer Price Index (CPI).

According to Huffington Post.com, the CPI would have to show a remarkable uptick in price to effect the SSA's decision not to provide the annual cost of living adjustment (COLA) which, by statute, is based on the rate of inflation.

If there is no measurable increase in the cost of living, then there is no adjustment, a rationale that unsurprisingly placates roughly zero beneficiaries.

Social Security recipients eagerly anticipate the annual increase. Touching a senior's COLA is a political third rail. Florida GOP challenger Dan Webster found that out the hard way when he suggested the federal government "take back some of the COLAs for the entitlement programs." Under withering fire from the elderly, he quickly backed off the suggestion, saying that he meant his comments to apply to federal workers -- who, of course, are not paid by "entitlement programs."

The backtracking largely got him out of the jam, but Democrats will be in their own fix when the announcement is made public. The COLA announcement will come as little surprise, since inflation has remained relatively low all year as a result of Federal Reserve efforts.

Republicans Accuse Dems of Using IRS Audits to Bully Conservative Groups

From TheBlaze.com:

Congressional Republicans are accusing Democrats and administration officials of leaking privileged IRS information and using invasive audits to bully conservative groups, the New York Times says, and they are not happy about it.

The first charge by Republicans Senators centers around a senior Obama administration official who may have improperly accessed the tax records of Koch Industries, an oil company whose owners are major conservative donors, while the second charge lambastes Senator Max Baucus (D-MT) for scoping the funding activities of historically conservative tax-exempt groups.

According to the Times, the Treasury Department has opened up an investigation regarding allegations by Sen. Chuck Grassley (R-IA)* and six other Republican senators who claim a senior administration official disclosed confidential taxpayer information regarding Koch Industries — whose owners are major conservative donors — during a conference call with journalists.

During that call, the official pointed to Koch Industries as an example of “multibillion-dollar businesses that are structured as partnerships in ways that allow them to avoid paying sizable corporate taxes.”

Goodbye To TARP, But Good Riddance?

From Forbes.com:

The Troubled Asset Relief Program expires Sunday, meaning the Treasury Secretary can commit no more funds from the bailout legislation Congress passed two years ago.

Since then, the TARP, which gives the Secretary enormous power to spend up to $700 billion in basically any manner he pleases in order to buttress the economy, has been reviled as the mother of all bailouts. Among other things, it has been used to assist banks and insurers, bail out General Motors and Chrysler, and solve America’s foreclosure problem. It kicked off the anti-government spending movement, which has culminated in the success of many Tea Party candidates this year.

To be sure, TARP has had its faults, including a lack of transparency, failure to fix the housing market and mission creep. (It was supposed to be used to relieve banks of toxic assets, remember?) Read any of watchdog Neil Barofsky’s quarterly reports to Congress for an accounting of them.

But was TARP such a bad idea? Increasingly, it’s looking like the answer is “no.” The Treasury Department now estimates that losses to the economy from the TARP will be $50 billion at worst. By any measure, that’s a lot of money, but it’s not anywhere close to the $700 billion that TARP opponents have argued that taxpayers are responsible for. In fact, not even $400 billion in TARP money has been spent. From The New York Times Friday:

Whatever the final losses from housing, auto companies, A.I.G. or smaller banks, those will be offset by taxpayers’ profits from the big banks that have been the focus of their ire since 2008.

They have repaid their loans and Treasury has collected about $25 billion more from dividends and proceeds from the sale of warrants held as collateral, officials say. Many smaller banks hold on to their loans, however, reflecting their weakness and the desire of some others to keep the money given its advantageous terms. Scores are behind on dividend payments to the Treasury.

Tax Hikes to Expect in 2011

As we wait for Congress to take up a handful of tax and financial issues, taxpayers across the country are wondering what tax laws will change in 2011. A handful of tax cuts and incentives are scheduled to expire at the end of the year, and unless Congress takes action Americans are going to pay more taxes in 2011. These hikes are going to affect more than just taxpayers making over $200,000 per year. There are dozens of tax changes on the horizon that could hit families of all kinds of different income levels. To help readers of my blog prepare for the potential changes, I have put together the following list of tax hikes to expect in the coming year.

Income Tax Rates

Depending on what action Congress takes on the Bush tax cuts, income tax rates could increase significantly in 2011. President Obama has urged congress to only allow the cuts to expire for taxpayers making over $200,000. However, Congress must decide the fate of these tax rates and unless they pass legislation in the next few months, tax rates will increase for all taxpayers. For more information on the impact of the Bush tax cuts check out this blog entry I posted a few weeks ago.

Estate Tax

As many of you already know, the estate tax expired at the end of last year and was not extended. Therefore taxpayers who inherited a sizeable amount of money this year did not have to pay the standard estate tax. Next year the tax is scheduled to be reinstated at a higher rate (55%). It will also target taxpayers receiving smaller estates. Additionally, if Congress does take up the issue they might instate a retroactive tax that could affect Americans who thought they were able to avoid the estate tax.

Dividends

Qualified dividends are currently taxed at 15% because of the Bush tax cuts. However, if the cuts are allowed to expire, that rate will increase to nearly 40% for some taxpayers. This could represent a significant increase to taxpayers who rely on income from dividends.

Capital Gains

Another area the Bush tax cuts would impact is the capital gains rates. Depending on how Congress acts, the rates could rise to 20% in 2011. The increase is likely to only hit high-income taxpayers, and if you are worried about the hike then you might want to consider selling off some of your gains in 2010. However, you should always speak with a financial advisor to determine the most advantageous strategy.

Sin Taxes

Lots of taxpayers have seen drastic increases on cigarette taxes over the past year as local government agencies seek sources of additional revenue. However, these are not the only sin taxes that have increased. As part of the health care reform bill an indoor tanning tax was instituted, and going in to 2011 you can expect to see many more sin tax increases, especially at state and local levels.

Marriage Penalty

Married taxpayers should be concerned about another looming tax hike in 2011. Unless Congress addresses the issue, the "marriage penalty" will return next year, which has significant implications on couples that have significantly different income levels. Luckily, some of these taxpayers might be able to avoid the penalty by filing separately.

Deduction Caps

Although not a direct tax hike, the new deduction caps looming in 2011 will force many high-income taxpayers to pay more to Uncle Sam. President Obama has expressed interest in limiting the value of deductions at 28%, but has faced significant opposition. Many charitable groups have spoken out against this tax change, with fear that it will result in fewer donations from Americans.

Business Taxes

Small and large businesses should also expect tax increases in the next year. There are going to be higher SECA taxes for owners of S firms and partnerships, restrictions on worker classifications, and an elimination of the deduction for domestic production.

Audits

The last thing that any taxpayer wants to hear is that the likelihood of an IRS audit will increase in the next year. However, the White House has been pushing the IRS to crackdown on both small businesses and individuals. Earlier in the year Treasury Secretary Timothy F. Geithner even asked Congress for additional funds to support the increased collection efforts.

Recovery.Gov a Model for Transparency

Recovery.com, the government funded site created to track the spending of government stimulus money, is celebrating it’s one year anniversary today. As this article from USA Today explains, the site has become a model for spending transparency and led to the creation of other sites such as USAspending.gov.

Of the $814 billion in government stimulus spending, there's $18 million that could forever change the way government spends money.

That's how much the Recovery Accountability and Transparency Board spent to create Recovery.gov, the website that tracks where the government's stimulus money goes.

The website turns 1 year old today. While it's had a number of publicized flaws, the site already has become the template for how the government will collect and report on its spending.

On Friday, the federal government will begin requiring recipients of non-stimulus money to report to USAspending.gov where that money's going — just like the Recovery.gov does for stimulus funds.

"For good or bad, the needle has been moved by Recovery.gov," says Gary Bass, founder of OMB Watch, a non-profit group that tracks federal spending.

The requirement to make federal spending transparent started before the stimulus. In 2006, Congress required that the government create USAspending.gov — but efforts to get federal recipients to report where the money went fell almost two years behind schedule.

Continue reading at USAToday.com…

Congress Punts on Taxes

According to the Wall Street Journal Democratic members of congress have decided to wait until after the November elections to decide the fate of the Bush tax cuts. Unfortunately, the move raises uncertainty for small business owners, and taxpayers across the country. It will also create a huge battle over taxes at the end of this year.

If returning lawmakers don't pass legislation by Dec. 31, the expiration date of the cuts, tax rates would rise not only on income, but also on estates, capital gains and dividends. Important corporate tax credits and relief from the Alternative Minimum Tax also are up for renewal.

Democratic leaders and President Barack Obama made the proposal to extend the middle-class tax breaks a centerpiece of their midterm campaign strategy. They now face the possibility their members are vulnerable to Republican charges that they have failed to prevent taxes from rising for almost everyone.

Congressmen from both parties said the toxic politics of taxes and the crush of issues to be resolved increased the likelihood all the Bush-era breaks, including those for higher earners, would be extended at least for a year or two. But Mr. Obama could still veto such a bill.

For now, taxpayers confront a number of worrisome scenarios, including the possibility Congress might deadlock on the issue in the post-election "lame duck" session, resulting in across-the-board tax increases.

With taxes a hot-button issue on the campaign trail, lawmakers threw in the towel Thursday until after the elections. Sen. Richard Durbin, the No. 2 Senate Democrat, said, "The reality is, we are not going to pass what needs to be passed to change this, either in the Senate or in the House, before the election."

Continue reading at WJS.com…

Another Tax that Democrats want to Raise from the Dead

While Congress continues to debate whether or not to extend the Bush tax cuts, some members of the Senate have reportedly been considering an estate tax hike. The tax expired at the end of last year and is scheduled to return at a rate of 55% in 2011. However, a couple of Congress members are suggesting a new 65% tax.

The Washington Post reports:

The Senate Redistribution Caucus—Bernie Sanders (Vermont), Sheldon Whitehouse (Rhode Island), Al Franken (Minnesota), Sherrod Brown (Ohio) and Tom Harkin (Iowa)—are sponsoring the Responsible Death Tax Act to take the federal rate to 65% on large estates. Why stop at two-thirds, guys? Clearly, you think the government has a right to every penny a man makes in a lifetime.

These same five plus Budget Chairman Kent Conrad of North Dakota also want to retroactively apply a death tax to January 1, 2010 on the estates of those who have already died this year. Their revenue grab gives new meaning to the phrase grave robbers. Too bad George Steinbrenner, who died earlier this year and whose family will be able to retain control of the New York Yankees in part because of the lack of an estate tax, can't come back from the dead and shout at these guys.

It's not merely the super-wealthy who will pay these rates unless they shelter their assets in foundations the way that Bill Gates and Warren Buffett have. Estates with as little as $1 million in assets would get hit at the reinstated 55% rate. That $1 million has not been indexed for inflation, so each year more and more middle class families would pay when mom or dad dies. For hundreds of thousands of families, $1 million can easily be the value of the family home, furniture, jewelry, cars, plus a 401(k). All of this would be fair game for IRS confiscation.

The ability to transmit wealth from one generation to the next is a core motivation for Americans to save, reinvest in the family business or accumulate wealth. A 1980 study co-authored by White House economic adviser Larry Summers on savings and capital accumulation in the first three-quarters of the 20th century found exactly that: Americans continue to save even as they get older so they can pass their lifetime legacies on to their kids. But if you can't take it with you, and you can't leave your lifetime earnings to your children or grandchildren, the motivation is to spend down wealth to zero at the time of death.

Read more here