Dakota Beacon

Early on the morning of September 30, the Democratic Congress adjourned without addressing many of the nation's more pressing issues and is not expected to return until after the November elections.  In adjourning, Congress has decided to ignore its basic responsibilities to govern.  This year, Congress failed to adopt a budget, failed to pass each of the 12 bills to fund the government for the coming year, and has now failed to address the job-killing tax hikes that are scheduled to take effect on January 1, 2011. 

In doing so, Congress has created tax uncertainty that will have a very negative impact on businesses' ability to plan.  This means businesses will hold off on hiring and investing to create jobs until they know what their tax liability will be in 2011. The following is a breakdown of the tax hikes that Congress failed to address, many of which will go into effect in January 2011.

Personal Income Taxes: In 2001 and 2003, Republicans passed legislation to cut personal income taxes. These cuts, commonly referred to as the Bush tax cuts, are set to expire on December 31, 2010. If Congress fails to act before the end of the year, individual taxpayers in every tax bracket will see a significant increase in their income taxes.  The lowest income tax rate will rise from 10 to 15 percent, while the highest will rise from 35 to 39.6 percent; every tax bracket in between will see an increase, as well. 

In addition, the Republican-controlled Congresses of 2001 and 2003 phased out limits on itemized deductions and personal exemptions for higher-income taxpayers; in January, these limits will go back into effect.  As Ryan Ellis of Americans for Tax Reform points out, the return of these limits on itemized deductions and personal exemptions will have "the same mathematical effect as higher marginal tax rates."

Much of the debate over whether to extend the tax cuts has focused on one key difference: Republicans and a few Democrats want to extend all of the cuts, while President Obama and most of the Democrats want to let the tax rates increase for small businesses and individuals in the top tax bracket. Obama maintains that hiking taxes for the "wealthy" will add to the federal deficit. However, past practice has demonstrated that eliminating the tax cuts would have only a minor effect on deficit reduction.

In January 2001, the Congressional Budget Office (CBO) projected that the United States would run a $5.6 trillion surplus between 2002 and 2011. However, it now appears that this number will actually be a deficit of $6.1 trillion.  After analyzing CBO's 28 budget baseline updates since January 2001, Brian Riedl of The Heritage Foundation found that the 2001 "tax cuts for those earning more than $250,000 are responsible for just 4%" of the delta from projected surplus to actual deficits.  By comparison, spending and interest on the debt accounted for 44% of this swing.

In addition to the fact that raising taxes on Americans in the top tax bracket will have little impact on deficit reduction, allowing these cuts to expire will disproportionately harm small businesses. According to Ellis, two-thirds of all small business profits are taxed at the top income bracket tax rate. As Deroy Murdock points out, this means that Americans "who currently pay the 35 percent [income tax] rate generate roughly 66 cents of every dollar in taxable, small-company profits." If these small-business owners see their taxes increase in January, it will be difficult for them to expand their businesses and hire new people.