The Supercommittee Failed, What it Means for Your Taxes

The Supercommittee had its first organizational meeting in early September to get the ball rolling on creating legislation that would remove $1.5 trillion from the ever-growing federal deficit. The 12-member group set a drop dead deadline of Nov. 23 to create and vote on a plan that would accomplish this. Well, guess what? Nothing, that’s what. Absolutely nothing happened.

Because of political differences, the lawmakers failed to come to a compromise. My mother used to say: Don’t fight in a burning house. Well, they did, and everything went up in smoke.

President Obama’s approach in his 2012 proposed budget was to reduce the deficit by implementing a combination of spending cuts and allowing the Bush tax cuts for the wealthy expire. He would also eliminate tax benefits (carried interest) for oil companies and hedge fund managers.

The Republicans had a different plan: They wanted to reduce the deficit through spending cuts alone, including changes to Medicare and Medicaid. They were not in favor of direct or indirect tax increases.

Who’s to blame? I say, who cares who’s to blame? Like my mom, the Japanese have a great saying too: Don’t fix the blame, fix the problem.

So c’mon, Congress, can’t we just all get along? Can’t we just fix this ballooning problem?

The last budget surpluses enjoyed in this country were during the years 1998-2001 when tax revenues were 19-21% of gross domestic product and spending was slightly less than that. According to data gathered by AES at the University of Denver, current spending is at 25% of GDP while revenue is at 15% of GDP. Our national debt ballooned from $5 trillion in 2001 to more than $10 trillion by 2009, and now is more than $14 trillion.

It wasn’t a lack of ideas that stopped the Supercommittee to reach an agreement on how to trim our expanding deficit.

The National Commission on Fiscal Responsibility (Simpson-Bowles deficit reduction commission) threw a few ideas to the Supercommittee, including creating three tax brackets between 8% and 28% and repealing the Alternative Minimum Tax (AMT). It suggested eliminating the preferred tax rates for capital gains and dividends, and reducing the maximum corporate rate to 26% from 35%.

Then there was the “Gang of Six” (a bipartisan group of six members of the Senate Finance Committee), and they pretty much agreed with the National Commission with less specificity as to the elimination of tax expenditures and Social Security reforms

The “Ryan Plan,” which was passed by the House but not the Senate, was in favor of no tax increases along with significant budget cuts, which included changes to Medicare.

If a bill to reduce the deficit does not become law by Jan. 15, 2012, the Director of the Office of Management and Budget (OMB) is required to cut defense and non-defense programs sufficient to produce $1.2 trillion in savings over 10 years, which represents approximately 8% in cuts from projected spending levels. They say that Social Security payments, Medicare premiums, copayments and certain low-income programs will be exempt from these across-the-board cuts. And that the cuts to Medicare will only come from provider payments, capped at 2% of the annual cost of the Medicare program.

You can expect taxes to also go up. The Bush tax cuts will expire, capital gains rates will increase and taxes on the wealthy will rise. If you are in a high-income tax bracket, you may want to set up a tax planning conference with your tax advisor to determine what moves to make before year end. Or if you are contemplating selling appreciated stock, now might be the time to do it. Capital gains rates are sure to rise.

Payroll tax decrease. Congress reduced the payroll tax--the Social Security and Medicare withholding from peoples’ checks--and now Democrats want to reduce it even more. In 1941, Franklin Delano Roosevelt, who inspired the Social Security program, said, “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.”

On Friday, Dec. 9, 2011 a bill introduced by House Republicans, known as the Middle Class Tax Relief & Job Creation Act, would extend the current payroll tax cut for one year and trim Social Security and Medicare withholding taxes to 4.2% from 6.2% to prevent taxes from rising an average of $1,000 a year for middle-class workers. Democrats, conversely, have proposed expanding the tax cut next year to 3.1%.

Also unlike the Democratic legislation, the Republican version would not levy a surtax on income over $1 million to offset the cost of the payroll tax cut. Instead, it would extend the current pay freeze on federal employees, gradually increase Medicare premiums for high-income retirees, reform the unemployment insurance program and reduce the maximum number of weeks the jobless may collect benefits from 99 to 59.

Congress continues to make sounds about “restructuring” the Social Security and Medicare programs, which sounds like a reduction in benefits. They couch it in tricky ways by proposing increases to the retirement age and turning Medicare into a voucher program with capped government payments.

The Social Security and Medicare programs are not running at a deficit. In fact, there’s a $2 trillion surplus. It’s been a successful program; a mandatory savings for retirement much needed by those who do not have the discipline to voluntarily put something aside for old age. And there are more benefits than just the monthly payouts. The kick in of medical coverage alone is quite valuable.

Should the government have the ability to dip into our retirement funds simply because they must spend more than the revenue they acquire? If this were the private sector, somebody would be going down for such an offense.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.