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One-Minute Thought — The Debt Limit, Politics, and Taxes

The US reached its “debt limit” of $14.294 billion on May 16, 2011. According to our rough calculation that is just under $50,000 for every man, woman, and child in the US Treasury Secretary Geithner has authorized some “extraordinary measures” to postpone the need to raise the debt limit until early August 2011. Weren’t “extraordinary measures” the same thing that got Lehman Brothers into trouble? It appears Congress is unable to agree on how to extend this borrowing or even if the US should extend its borrowing. 

Back in 1995 then President Clinton and Newt Gingrich had a standoff, which resulted in a prolonged government shutdown. The current deficit is running about 10% of the gross national product. The debate in Congress is what to do about it? Will it get to the stage of another government shutdown? Should the deficit be tamed solely by spending cuts? Will that have a harmful effect on the economy? Is a 35% federal income tax rate and up to 10% state income tax rate too low (ignoring non–income taxes)? Should taxes be raised? Are high tax rates a hindrance to the economic well-being of the US? Will there be a compromise? A responsible Congress would answer all these questions before the end of the summer. What do you think?

It seems that history often repeats itself. Back in the mid-1980s, President Reagan and Bill Brady decided to lower tax rates, cut out many of the tax breaks that were in the law at that time, and grow the economy through a simpler tax system (however, the passive-activity rules came from this). Now, we are hearing that in exchange for a lower corporate rate, the research-and-development credit and domestic-manufacturing deduction (among others) could be on the chopping block. Some have suggested the entire tax code is dysfunctional and there is a need to scrap it and move to a value-added tax, which is believed to be simple and fairer. Others claim a value-added tax is regressive and would need to be in the range of 20% to 30% to replace the current revenues raised by the federal income tax.

Unfortunately, we are getting close to an election season. We doubt that there will be any major movements to address an extremely complicated tax system, much less how to control the deficit in the short term. However, one thing we do know. At some point the deficit needs to be tamed. The answer may largely depend on the upcoming 2012 elections. Stay tuned for more as it becomes available.

For further discussion, feel free to contact Michael Calahan at  mcalahan@BlackmanKallick.com or 312-980-2996, Craig Maksymiak at  cmaksymiak@BlackmanKallick.com or 312-980-2977, or your Blackman Kallick tax advisor.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.