Family and Business Tax Cut Certainty Act of 2012

Analysis of the

Family and Business Tax Certainty Act of 2012

President Reagan (1986) said, "The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it, and if it stops moving, subsidize it. " There has been increased media coverage, debates, and protests about the type of tax benefits and cuts that are given every year. Occupy Wall Street is one of these examples. In New York City, the activist group Adbusters started a protest to bring awareness to the lobbying practices and tax loop holes that were given to the wealthy (www.occupywallst.org). The most recent situation is the expiration of the tax laws that were implemented when President Bush was in office, and then later extended in the first term of President Obama. The current debate is whether we will allow those making more than $250,000 a year to pay more in taxes or create a tax benefits for the wealthy and private businesses. requiring those making more than $250,000 a year to pay more in taxes can help to reduce the deficit and create more economic growth in America. The argument is whether allowing companies and the wealthy to keep the current tax rate or a possibly lower rate will help to boost the economy. Former Presidential Candidate Mitt Romney stated “To repair the nation’s tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government” (Romney, 2012).

Nevertheless, this long-term tax cut helped shorten the recession following the dot-com crash, saving the economy from more stimulus measures. The Bush tax cuts expired in 2010 and were extended under the direction of President Obama. Historically, there has always been the thought that taxation has been set up to either hinder the middle class, the poor, corporations, or the wealthy, depending on the time and enactment of bills regarding tax regulation. For example, with America in its current recession, keeping tax rates low for the middle class and allowing the tax cut to expire for the wealthy can aid in rebuilding a stronger economy The Alternative Minimum Tax (AMT) is a tax on income enforced by the federal government. It was created in 1969 and taxes corporations, trusts, individuals, and estates (U.S. Congress Joint Economic Committee 2009). The original AMT was created to present additional tax benefits to only a certain group of people. The current AMT was enacted in 1982, which allowed for an increase in deductions, credits, and benefits. For example, the Innovation Technologies Investment Act is a benefit that allows a 25% tax credit for Angel investments, which is given in grants for small business research. The AMT is mandated by the Government and taxes individuals, trusts, corporations, and estates (United States Government Accountability Office General Government Division 2011). The Family and Business Tax Certainty Act of 2012 implies that without the credit, the private market would not be able to have the financing that would allow for a start-up business or investing (Accountability Office General Government Division, 2011). This may allow corporations to make investments which may not have been affordable in the past, which in turn creates jobs and aids in spreading wealth in America. Despite the theoretical belief that creating tax cuts for companies that would help the economy, it did the opposite. In 2008, the National Governors Association Issue Brief stated that a tax credit only gives companies more money to make investments that they planned on making without the help of the federal Government (Internal Revenue Service, 2011). According to the 111th Congress, “The Innovation Technologies investment Act is a bill to amend the Internal Revenue Code of 1986, to allow a credit for equity investments in high technology and biotechnology small business concerns developing innovative technologies that stimulate private sector job growth”(111th Congress, 2010). As a result of the practice tax revenues declined while there were no new investments made on behalf of the companies. They continued with the same business plans that were carried out before they were given tax breaks. Essentially, companies are not increasing the number of employees; companies are increasing the amount of investment to create a profit.

Economic Effects

According to Congressional Budget Office 2012, the current tax cuts and credits will cost the United States over 1 trillion dollars a decade if they are not changed. We need to focus on creating tax cuts for families and small businesses to foster a better economy. Reducing the amount that families pay in taxes could generate more spending and investments made by the middle class. These investment companies remain focused on putting their money in investments that they were already willing to make without a tax credit. The report also showed that the given credit creates a system where fewer companies are getting funded and are competing for deals in the same market that they were already investing in. The Family and Business Tax Cut Certainty Act of 2012 was created to extend cuts to individuals and joint filing married households. One argument is that the tax cuts need to be made in the business sector so that industry can invest more and become a productive part of the global economy.

Currently, the industrial tax is at about 35%, which is one of the highest among many industrialized countries (IRS.gov, 2012). This is thought to be hindering the US wage amount because the high tax rate on corporations is creating an environment that cannot allow them to afford to keep jobs in the United States, employ people at respectable wages, or compete with other international business. Mitt Romney states on his website that the corporate tax rate should be reduced to 25% and that the corporate Alternative Minimum Tax (AMT) should be repealed. If this were to happen, it may allow corporations to pay less, make more, and leave the lower and middle classes to pay a higher tax rate. This is viewed to be very detrimental to the United States. The current tax benefit will expire on January 1, 2013, and this will result in 114 million families that will receive a higher tax rate (Whitehouse.gov, 2012). This could send many families into deeper poverty and has been the outcry of politicians and citizens concerned about the change. There is an attempt by the House of Representatives to extend the tax cut only if they are permitted to also allow the cut to affect those that make more than $250,000 a year (United State Committee on Finance, 2012). It would also give families that make more than 1 million dollars a year an estimated $160,000 tax cut next year.

Background History

Taxation has been the main way for the government to create revenue. In the Colonial Era, the 13 colonies each raised revenue separately in different ways (Internal Revenue Service, 2011). Taxation has taken place whether it is taxing tobacco, spirits, or creating other tariffs on imports or real-estate (Adams, 1994). Since the beginning of government, there has always been some sort of increase, decrease, or shift in tax depending on populations and intended outcomes. In A Brief Tax History of America, Adams (1994) explains the many changes and causes of new tax regulations throughout history. One of the most famous demonstrations against taxes was the Boston Tea party; a group of Americans threw 342 chests of tea into the Boston Harbor to protest the tax imposed by the British government.

Adams (1994) also mentions that during the Civil War, there was a big change in the way and type of tax people were paying. In order to finance the war, the Revenue Act of 1861 was created and implemented. This was a tax of 3% on incomes that were more than $800 a year. This was later changed to a tax on those making between $600 and $10,000 a year to pay 3%, while those making more than $10,000 would pay a 5 % interest rate. This showed that even during the 1800s, it was still recognized that those who make more should pay more. It also allows us to see that with the debt that was created in that time period, there needed to be an increase of tax revenue to cover it. Adams (1994) proves this again, when he reveals that in 1917, the War Revenue Act lowered exemptions and increased taxes from an 809 million dollar revenue to a $3.6 billion revenue for the government. In 1944, the Individual Income Tax Act was passed; this created a deduction form for individuals, which could allow for more deductions and less income tax to be paid by those filing as individuals. The amount of tax paid when this bill was introduced has fluctuated. In 2001, reforms that were made to the tax structure were changed a great deal, and now there are 2 bills that are both trying to address the issue of taxation. The Innovative Technologies Investment Incentive Act of 2012 and the Family and Business Tax Cut Certainty Act of 2012 are both trying to address this issue. The Technologies Initiative is an attempt to reform the tax code of 1986 which would allow for businesses to receive receiving a greater tax break. This in theory, would allow them to invest more and create more jobs here in the United States. The extended AMT currently allows for taxpayers filing jointly an exemption at $45,000 and individuals an exemption of $33,750 under the AMT. Under the new proposal for 2013, the exemption will be increased to $50,150 for individuals and $79,850 for joint filing families. This new proposal will take effect on December 31, 2013 and is estimated to cost a total of $132.2 billion over ten years (Financesenante.gov, 2012). The bill also allows deductions for elementary and secondary school teachers, mortgage debt relief, deductions in state and local general sales tax, a means testing tax refund program, Military housing allowances becoming a part of the low housing credit, and a 9% credit freeze for low income housing.

To address the tax burden in 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was created. This was introduced to the house by William Thomas on May 15, 2001, with the intent to lower the current tax rate including those for gifts, estates, retirement, and business. The Heritage Foundation predicted that this new revision to the 1836 tax code would significantly reduce the debt of the United States by allowing people and businesses to use the saved money for investment. We all know that since this has taken place, we have reached massive deficits since the change was implemented. Under this revision, the 28% tax bracket was reduced to 25%, the 31% bracket was reduced to 28%, the 36% bracket was reduced to 33%, and the 39.6% bracket was reduced to 35%. The tax amount changed for capital as well. Wilson indicates that “The capital gains tax on qualified gains of property or stock held for five years was reduced from 10% to 8% for those in the 15% income tax bracket” (Wilson, 2001). The estate tax combined credit omission was $675,000 in 2001, but planned to go up to $1,000,000 in 2006, was amplified to $1,000,000 in 2002, $1,500,000 in 2004, $2,000,000 in 2006, and $3,500,000 in 2009. This ultimately became a tax rate of 45% on 2,000,000 or more in 2007. At the same, time we were increasing government spending and allowing individuals and businesses to pay less, which did not help to cover most of the United States’ deficit.

In the United States, we have created a deficit due to an unplanned war and weakened economy. It is well known that the debt that has been created has grown and will continue to grow if drastic cuts are not made, and we do not pay down the debt. Throughout history, it has always been protocol for a government to create tax revenue; it must raise taxes. It is important that we allow this to happen but not have the effects of taxation affect those who are already economically disadvantaged.

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