Gei­th­ner has power to keep tax lev­els

Im­pact

Austin American-Statesman - - THE SECOND FRONT - Con­tin­ued from A

Even if the cri­sis is re­solved quickly af­ter the new year as pres­sure mounts on Pres­i­dent Barack Obama and law­mak­ers, it poses a short­term ad­min­is­tra­tive night­mare for busi­nesses. And it would be a fi­nan­cial blow to mil­lions of peo­ple strug­gling to make ends meet in the af­ter­math of the Great Re­ces­sion.

As the White House and Congress try to avoid the large tax in­creases and fed­eral spend­ing cuts coming next week, tax­pay­ers, busi­nesses and even the In­ter­nal Rev­enue Ser­vice are scram­bling to fig­ure out the ef­fects if an agree­ment is not reached.

The fis­cal pain could be averted by a last-minute deal. And even if there is none by Tues­day, Washington pol­i­cy­mak­ers could retroac­tively re­duce tax rates if they ul­ti­mately make a deal. But the un­cer­tainty and short-term loss of in­come could dam­age an al­ready frag­ile econ­omy. Some ef­fects:

In­come taxes: Rates would rise on ev­ery­one as the Ge­orge W. Bush-era tax cuts ex­pire. Mid­dlein­come house­holds would get hit hard, paying about $1,500 more a year in taxes.

Pay­roll taxes: Rates would in­crease by 2 per­cent­age points with the lapse of a tem­po­rary, two-year tax cut de­signed to boost the econ­omy. Work­ers mak­ing $50,000 an­nu­ally would take home about $40 less ev­ery two weeks.

Long-term un­em­ploy­ment ben­e­fits: Checks would abruptly end for peo­ple re­ceiv­ing ex­tra fed­eral aid. State ben­e­fits would still be avail­able, but work­ers would be out of luck once those run out.

Alternative min­i­mum tax: The num­ber of peo­ple fac­ing the pro­vi­sion would sky­rocket to about 33 mil­lion next year from 4 mil­lion this year. The tax, en­acted in 1969, was de­signed to make sure the very wealthy paid some in­come tax. But it was not in­dexed to in­fla­tion and needs to be fixed each year to avoid en­snar­ing mid­dle-in­come house­holds. Although Congress at some point is ex­pected to spare most of those peo­ple from that tax, de­lays in do­ing so mean that as many as 100 mil­lion peo­ple might not be able to file their re­turns un­til the end of March or later, ac­cord­ing to the IRS. De­lays would come as the IRS has to re­pro­gram its sys­tem, as well as for tax­pay­ers who would have to do spe­cial cal­cu­la­tions to de­ter­mine whether they owe money be­cause of the tax.

Busi­nesses al­ready are strug­gling to ad­just. They’ve got to fig­ure out how much in fed­eral taxes to with­hold from em­ployee pay­checks start­ing next week. But as of Thurs­day, the IRS had not told em­ploy­ers what the 2013 with­hold­ing lev­els would be.

The IRS said it con­tin­ued “to closely mon­i­tor the sit­u­a­tion” and would “is­sue guid­ance by the end of the year.”

Work­ers might not see the new in­come tax rates im­me­di­ately re­flected in their pay­checks. The Amer­i­can Pay­roll As­so­ci­a­tion is ad­vis­ing its mem­bers to con­tinue to use 2012 with­hold­ing ta­bles un­til they hear dif­fer­ently from the IRS.

Adding to the un­cer­tainty is the abil­ity of Trea­sury Sec­re­tary Ti­mothy Gei­th­ner, who over­sees the IRS, to main­tain the 2012 with­hold­ing lev­els even af­ter tax rates rise.

Gei­th­ner could use the author­ity to pre­vent a short-term hit to the econ­omy and po­ten­tial con­fu­sion to em­ploy­ers if it ap­pears a deal to pre­vent some of the tax rate hikes was still pos­si­ble even af­ter the New Year’s Eve dead­line. There’s prece­dent for such a move. In 1992, Pres­i­dent Ge­orge H.W. Bush or­dered with­hold­ing lev­els tem­po­rar­ily set lower than fed­eral tax rates to stim­u­late the econ­omy.

Gei­th­ner has been cagey about whether he would take such a step.

“Don’t over-in­ter­pret what that author­ity gives me,” he told Bloomberg TV last month. “It does not give me the author­ity to ... let (Congress) avoid mak­ing some de­ci­sions on rates and pol­icy.”

A Trea­sury spokesman had no fur­ther com­ment Thurs­day.

Freez­ing with­hold­ing lev­els would help for a short time, be­cause it would pre­vent the loss to con­sumers of about $10 bil­lion ev­ery twoweek pay pe­riod in higher taxes, said Mark Zandi, chief econ­o­mist at Moody’s An­a­lyt­ics. But he said it is not a long-term so­lu­tion to the hit that the econ­omy would take from a con­tin­ued stand­off.

Fail­ure to pre­vent the tax in­creases and spend­ing cuts, he said, would lead to drops in fi­nan­cial mar­kets and re­move in­cen­tive for busi­nesses to in­vest. Most econ­o­mists pre­dict it would send the U.S. into an­other re­ces­sion in the first half of next year.

“It’s not the end of the world if we go into 2013 with­out a deal. In fact at this point, I ex­pect that,” Zandi said. “If they freeze the with­hold­ing, I think they’d prob­a­bly have un­til mid-Jan­uary un­til (the bud­get im­passe) starts do­ing some real dam­age.”

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