Bush Tax Cuts Linger Long After SunsetPosted September 16th, 2010
Why is this Topic Important to Wealth Managers? Provides an overview of how the pending tax cut provisions will affect the national economy and your clients as a part of it. Discusses generally the relationship between tax and Congressional budget as they relate to the taxpayer burdens.
In the face of bailouts, new legislation and regulation, and a stalling economy, one area, taxes, is certainly being discussed among the public scuttlebutt. Specifically, the Bush Era Tax Cuts are the center of attention because they will sunset or expire, without further legislative action by the end of this year.
On the one hand, having the tax cuts expire will reduce disposable income available to consumers. “Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt”, states Peter Orszag, past director of the White House Office of Management and Budget. On the other hand, our national budget deficit for 2010 is estimated, according to the Congressional Budget Office, to “total more than $1.3 trillion.”  As Mr. Orszag puts it, “[a]lthough hardly anyone wants to admit it, we’re not going to solve our budget problem over the next decade unless revenue is part of the equation.”
This fiscal balancing looks something like this:
- Budget shortfall this year of 1.3 trillion dollars- “Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP.”
- Expiring tax cuts help raise some revenue- Assuming no legislation is passed in regards to the sunset provisions, the “federal budget deficit would decline substantially over the next two years—to 4.2 percent of GDP by 2012.”
- Long term effect of excess spending- Projected deficits total $6.2 trillion for the 10 years starting in 2011,” which essentially means the country has no plan to turn a profit in the next decade.
- Burden increase on taxpayers- Economic projections show a significant increase in “federal debt held by the public to [an unprecedented level of] more than 69 percent of GDP by 2020” (or a mere 16.6 trillion dollars).
So what are some feasible (or not so feasible solutions) to reducing the national debt?
- Keep taxes breaks for some years then let them expire- This makes some sense because, “over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.”
- Decrease national spending –“Discretionary” spending represents approximately 38% of the national annual deficit in 2010 (comprised of 60% “security” and 40% “non security” spending). The federal government’s expenses are projected at 3.6 trillion this year to increase to over 5.7 trillion (or 63%) by 2020. The real issue, however, is underfunding of long-term obligations, (remember defined benefit retirement accounts) this is because Social Security, Medicare and Medicaid account for approximately 40% of the budgeted outlays for 2010. So unless Congress wants to decrease the checks it’s writing to these beneficiaries, it is estimated this sum will reach almost 50% of all federal funding in just 10 years.
- Renegotiate the interest rate or debt principal issued by the Treasury– As of this month the taxpayers have issued a total of, approximately 8 trillion dollars carrying an interest rate of approximately 2.35% per annum, as “debt held by the public net of financial assets”. This amount is generally issued as interest bearing securities, bonds or bills, and is held by individuals, corporations, local and state governments, foreign governments, and the Federal Reserve. In 10 years the “debt held by the public net of financial assets” will increase approximately 100% to over 16.6 trillion dollars. “Interestingly enough, just as consumers become leveraged, lenders generally become less willing to extend credit and require a higher interest rate from borrowers; the federal government is soon expected to face an average annual rate on its debt of 5.03% in ten years (more than double today’s rate). This amount is projected to incur an annual interest expense of $840 billion. Based on population growth statics, each man, woman and child in America will have an allocated annual “interest expense” of over $2,400.00.
Tomorrow’s blogticle will continue to discuss how wealth managers are advising clients regarding the tax cut issues.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 “One Nation, Two Deficits”. New York Times. Peter Orszag. http://www.nytimes.com/2010/09/07/opinion/07orszag.html?_r=2&ref=opinion. Published: September 6, 2010. Last Accessed 9/10/2010.
 “The Budget and Economic Outlook: An Update”. Congress of the United States,
Congressional Budget Office.. http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf. PG. 11. August 2010. Last Accessed 9/10/2010.
“One Nation, Two Deficits”.
 “Budget of the U. S. Government: Fiscal Year 2011.” Office of Management and Budget. Washington, D.C. 2011. U.S. Government Printing Office. Pg 153.
 “Budget of the U. S. Government: Fiscal Year 2011.” at 153, 183.
 “National Population Projections, Summary Tables”. U.S. Population Projections. U.S. Census Bureau. Released 2008 (Based on Census 2000). http://www.census.gov/population/www/projections/summarytables.html. Last Accessed 9/10/2010.