The Fiscal Cliff: Recession Looms Without Compromise, Leaders in Arkansas Fear

by George Waldon  on Monday, Sep. 17, 2012 12:00 am  

Congress will face a steep fiscal cliff when it returns to Washington D.C. (Photo by Wayne DePriest)

Expectations are that some of the Bush-era tax cuts will be extended for at least another year because of continued recessionary concerns.

President Barack Obama has expressed his intent to continue the tax cuts for households reporting income of $250,000 and below. Verbal jousting continues over whether majorities in Congress will go along with allowing taxes on high incomes to bounce back to pre-1991 levels.

If the Bush tax cuts aren't extended, the maximum long-term capital gains tax rate would return to 28 percent from 15 percent. The rate for short-term capital gains would return to the corresponding tax rate for ordinary income.

Ordinary income tax rates for the upper four tax brackets would return to 28 percent, 31 percent, 36 percent and 39.6 percent.

"We're hoping that common sense and bipartisanship will prevail to keep us from going over the fiscal cliff," said Randy Zook, president and CEO of the Arkansas State Chamber of Commerce.

"Because if we do [go over the edge], it will drive us to a recession. We can't afford it, and there's no reason for it."

On the revenue side of the equation, Zook is among those advocating the return of a special repatriation tax to encourage American companies to bring overseas profits back home.

He points out that U.S. companies are holding more than a $1 trillion overseas to elude federal corporate taxes. On paper, the U.S. corporate tax rate of 35 percent is one of the highest of any nation. However, through deferral and other strategies, American companies as a whole typically pay a fraction of that and some not at all.

"All that does is make companies invest more of their money overseas and conduct more of their business there to avoid U.S. taxes," Zook said. "Make it a permanent 5 percent tax. That can lead to dividend payments, which in turn can be taxed."

And if the Bush-era tax cuts aren't extended for higher-income taxpayers, such dividends would be taxed as ordinary income rather than enjoying the current 15 percent rate like capital gains.

Closing tax loopholes that facilitate American corporations keeping money generated by international subsidiaries untaxed and offshore would enhance revenue, too. But the political realities of that happening are rated as slim to none by Beltway pundits.

On the spending-cut side of the equation, Zook said changes to some entitlement programs could be less painful than others.

 

 

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