With Congress back in session, Democratic and Republican congressional leaders will have to deal with the very important issues of the bush tax cuts and expiring tax credits.

Senator Dick Durbin of Illinois, the senate’s No. 2 Democrat, said negotiations over extending the Bush-era tax cuts also will include prolonging emergency unemployment benefits and other tax credits.

“I want to put a couple other things on the table,” Durbin said today on NBC’s “Meet the Press.” “We do have unemployment running out,” he said, and “I also want to make sure the earned-income tax credit, the childcare tax credit, and the ‘Making Work Pay’ tax credit are part” of the discussion.

The Bush tax cuts, passed in 2001 and 2003 are set to expire on Dec. 31, 2010. President Obama will meet with Congress on Nov 30 to discuss the agenda.

Besides discussion on extending the tax cuts, Congress must decide what to do about unemployment benefits set to expire at the end of the month. The Labor Department estimates that more than 2 million Americans will lose unemployment benefits if Congress does not act.

Arizona Senator Jon Kyl, the chamber’s second-ranking Republican, said there is “an opportunity for us to sit down and negotiate a resolution to this that’s good for the economy.” Kyl also repeated a key sticking point for Republicans: “We don’t believe taxes should be increased on anyone.”

The President has argued the country can’t afford indefinitely extending tax cuts for the wealthiest Americans, defined by the president as individuals making more than $200,000 and couples earning more than $250,000.

Obama on the Bush Tax Cuts

“I believe it is a mistake for us to borrow $700 billion to make tax cuts permanent for millionaires and billionaires,” Obama told reporters Nov. 14. “It won’t significantly boost the economy and it’s hugely expensive, so we can’t afford it.”

Republicans, who won a majority of House seats in the Nov. 2 elections and narrowed the Democratic margin in the Senate, are pushing to permanently extend all the current tax rates. While Obama has said he wants to permanently extend just the tax cuts on earnings up to $200,000 for individuals or $250,000 for households — about 97 percent of all taxpayers, according to the Internal Revenue Service — he has indicated he’s open to negotiations on achieving that goal.

“We should be focusing on what it takes to move this economy forward,” Durbin said. “We should not be worried about the discomfort of the wealthy.”

Expiring Legislation

Unless Congress acts, marginal rates will increase for all income-tax payers. Tax credits benefiting families will be cut in half. The so-called married penalty that forces some couples to pay more than if they were single will be reinstated. Rates will rise on most dividends and capital gains, and a levy on estates valued over $1 million will be resurrected.

“What’s likely to happen is there will be an extension of the tax cuts for everybody for a period of time,” Senator Byron Dorgan of North Dakota, a Democrat who is retiring, said in an interview today on CNN’s “State of the Union” program.

Extending only the current rates for individuals earning less than $200,000 and couples making under $250,000 would add more than $3 trillion to the national debt over the next decade. Sustaining tax cuts for those with higher incomes would add an additional $700 billion to the debt over the next decade, Treasury Secretary Timothy Geithner has said.

An across-the-board extension of all Bush-era tax policies would cost the government about $5 trillion in foregone revenue and interest cost on the debt, the Congressional Research Service estimated last month.

With the Republicans taking control of the House in January, President Obama may have no choice but to negotiate and give in to resolve these issues.

Source: businessweek.com

President Barack Obama’s pick for U.S. trade representative is the fourth nominee to have tax issues. Former Dallas Mayor Ron Kirk will file amended tax returns for 2005 through 2007 and pay almost $10,000 in back taxes.

Ron Kirk’s tax problems stem from excess deductions for basketball tickets and failure to report speaking fees. 

White House officials and key senators call the errors minor and predicted that the issue should Kirk’s nomination to be U.S trade representative.

“When you put anybody’s tax filings under a microscope, people don’t have to be dishonest,” said Senate Majority Leader Harry Reid, D-Nev. “It’s just hard to do all the right things. It certainly shouldn’t disqualify him.”

Senate Finance Committee aides uncovered Kirk’s tax issues during weeks of his examination and evaluation for the cabinet position.  Kirk, a lawyer and the Texas Democratic Party’s 2002 Senate nominee, will file amended tax returns for the last three years and pay the Internal Revenue Service $9,975 plus interest.

This careless error pales in comparison to some other Obama Cabinet picks.

Treasury Secretary Timothy Geithner paid $43,000 in back taxes before his confirmation. Tom Daschle, the former Senate majority leader who withdrew his bid to lead the Health and Human Services Department, paid $128,203 in back taxes, plus interest, for failing to report as income the car and driver a friend had provided to him.

Labor Secretary Hilda Solis’ confirmation was delayed for weeks amid questions about her husband’s unpaid taxes. Outside the Cabinet, an Obama pick for a top White House job withdrew over questions about her tax compliance.

Texas Sen. John Cornyn, a member of the GOP leadership and the finance committee who defeated Kirk in the 2002 race, had been supportive of the nomination. But Monday night, an aide called the tax problems “a very serious offense.”

“He’s very disappointed,” Cornyn spokesman Kevin McLaughlin said. “He’s hopeful Mr. Kirk will take the opportunity to provide an explanation when he comes before the finance committee.”

The top Republican on the panel, Sen. Charles Grassley of Iowa, “will reserve judgment on the nomination until the vetting process, including the hearing and any follow-up questions resulting from the hearing, is completed,” said spokeswoman Jill Gerber.

His tax bill includes three main discrepancies:

1. He owes $5,800 because of $37,750 in honorariums from 16 speeches dating to 2004. He assigned the fees to be paid directly to a scholarship fund at his alma mater, Austin College in Sherman. The Finance Committee said he should have reported the income and claimed a corresponding charitable deduction.

2. Kirk owes $2,600 stemming from deductions for season tickets to the NBA Dallas Mavericks: $6,208, $7,035 and $4,139 in 2005, 2006 and 2007, respectively.

A memo issued by Democratic and GOP Finance Committee staffs said, however, that “he has substantiated $9,900 of the total $17,382 as qualifying entertainment expenses.”

3. An additional $1,000 in back taxes involved deductions for $25,218 in tax and accounting fees over three years. Kirk attributed 90 percent to his law practice, but that was too high.

Last October, Kirk also paid the IRS $2,188 plus $139 interest for tax year 2006, after the IRS notified him that he had failed to report a $5,000 speaking honorarium and $819 in dividend income.

Expect some tough questioning by members of Congress but the consensus is that Ron Kirk will be confirmed as the U.S. trade representative and join Obama’s cabinet.

It appears that a compromise in the economic stimulus plan could be reached as early as Friday and signed into law by President Obama on Presidents Day. But the question is will the Obama economic stimulus plan do enough to get consumers spending or is it a short term solution to get us through the recession instead of getting us out of it?

“I think (doing) nothing would have been better,” said Ed Yardeni, an investment analyst who’s usually an optimist, in an interview with McClatchy Newspapers. He argued that the economic stimulus plan fails to provide the right incentives to spur spending.

“It’s unfocused. That is my problem. It is a lot of money for a lot of nickel-and-dime programs. I would have rather had a lot of money for (promoting purchase of) housing and autos. … Most of this plan is really, I think, aimed at stabilizing the situation and helping people get through the recession, rather than getting us out of the recession. They are actually providing less short-term stimulus by cutting back, from what I understand, some of the tax credits.”

The House and Senate negotiators have narrowed the differences between their economic stimulus plans. In doing so they scrapped a large tax credit for buying automobiles that would have caused positive ripple effects across the manufacturing sector. They settled instead on letting purchasers of new vehicles deduct from their federal taxes the state and local sales taxes on the cars they bought. Will this economic stimulus line item really incite people to spend?

The exception to this is for buyers of plug-in hybrids, cars that run off a battery that can be charged at home or in the office. Buyers of these vehicles, available in very limited supply, could get a tax credit of up to $9,100.

A Republican-backed proposal that would have provided a $15,000 tax credit to first-time homebuyers also was scaled back dramatically. Instead, the compromise provides first-time homebuyers a tax credit of up to $8,000, and it doesn’t have to be repaid over the life of the mortgage. Incentives already in place offer buyers a $7,500 credit that must be repaid, so the bill is an improvement, but short of what many economists think is necessary.

Another reason that some analysts frown on the stimulus is the social spending it includes on things such as the Head Start program for disadvantaged children and aid to NASA for climate-change research. Both may be worthy efforts, but they aren’t aimed at delivering short-term boosts to economic activity.

“All this is 25 years of government expansion jammed into one bill and sold as stimulus,” said Brian Riedl, the director of budget analysis for the Heritage Foundation, a conservative policy research group.

The exception to this is for buyers of plug-in hybrids, cars that run off a battery that can be charged at home or in the office. Buyers of these vehicles, available in very limited supply, could get a tax credit of up to $9,100.

A Republican-backed proposal that would have provided a $15,000 tax credit to first-time homebuyers also was scaled back dramatically. Instead, the compromise provides first-time homebuyers a tax credit of up to $8,000, and it doesn’t have to be repaid over the life of the mortgage. Incentives already in place offer buyers a $7,500 credit that must be repaid, so the bill is an improvement, but short of what many economists think is necessary.

Another reason that some analysts frown on the stimulus is the social spending it includes on things such as the Head Start program for disadvantaged children and aid to NASA for climate-change research. Both may be worthy efforts, but they aren’t aimed at delivering short-term boosts to economic activity.

“All this is 25 years of government expansion jammed into one bill and sold as stimulus,” said Brian Riedl, the director of budget analysis for the Heritage Foundation, a conservative policy research group.

Others shared a similarly dim view. In a brief on the stimulus compromise, William Galston, a senior fellow at the center-left Brookings Institution and a former Clinton White House adviser, warned Thursday that a bank-rescue plan being finalized will make the $789 billion look like “pocket change.”

“While the stimulus bill is a necessary condition for economic stabilization and recovery, it is hardly sufficient,” Galston wrote. “As the lesson of Japan in the 1990s shows, fiscal stimulus without financial rescue yields stagnation – at best.”

Galston further wrote: ” … Serious observers believe that recovery cannot begin until we acknowledge that losses in the financial system amount to some trillions of dollars, rendering many institutions insolvent. The temptation will be to muddle along, hoping that these institutions can gradually regain strength without putting massive amounts of taxpayers’ money at risk. If we go down that road, we are likely to end up with zombie banks whose balance sheets are riddled with near-worthless investments – banks that cannot lend to credit-worthy customers and who cannot trust one another.”

With the economy in a tailspin, doing nothing isn’t an option, however.

“Something is better than nothing, and bigger was better than smaller in terms of the stimulus needed,” said Chris Varvares, president of prominent forecaster Macroeconomic Advisers in St. Louis. “The economy needs a fiscal jolt.”

Even some proponents of a stimulus are disappointed, however. Harvard University economist Martin Feldstein, a former adviser to President Ronald Reagan, was an early supporter. He said that government is now the only engine left to spark economic activity, but he said that the compromise falls short of what’s needed.

“If the choice is between the current bill and an improved bill, I would say wait and improve the bill,” Feldstein told CNBC on Wednesday after the compromise was announced. “I am disappointed with the structure of this bill.”

At the end of the say, both the Senate and House will compromise on the obama economic stimulus plan becasue the government economic stimulus is the last car left in town to “jump-start” the economy – and Congress is the “cables”.

source: Kansas City Star