Permanent Value

Week in Review 7/22/13

Bruce Doole
July 22nd, 2013

The Upcoming Debt Limit Debate:

The United States government has once again hit its borrowing limit. Congress had authorized the federal government to borrow $16.4 trillion and, as of the end of 2012, the government had done so. Congress subsequently extended borrowing authority through May 18, 2013.

The federal government can continue to operate without additional borrowing for about four months, perhaps a bit longer, after May 18 by paying bills with current tax receipts and funds in accounts set aside for future expenses. But by fall, Congress will have to raise the debt limit or the United States, unable to borrow to pay interest on its debt outstanding, will default on the national debt.

The Budget Debate and Entitlement Changes

Each house of Congress has passed a proposed budget for federal spending in 2014. The two budgets – the House (Republican) version and the Senate (Democratic) version – are opposite in almost every regard. The Democrats focus their spending cuts on defense and seek to “balance” their spending cuts with new taxes. The Republicans propose significant cuts in federal spending other than defense and eschew any tax increases.

Notably, the Republican budget seeks to cut not only discretionary government spending (which was the focus of the notorious “sequester” spending cuts), but entitlement spending as well. The primary demand of the Republicans is to change the rate of growth of Social Security benefits. Under current law, Social Security benefits increase each year based on the consumer price index (CPI). The Republicans seek to replace CPI with “chained CPI.” Chained CPI acknowledges that when the price of an item gets too high, people do not simply pay that higher price, they substitute something cheaper. If the price of beef gets too high, people buy more chicken. Chained CPI does not grow as quickly as conventional CPI. Thus, using chained CPI would slow the rate of growth of Social Security payments. Republicans also are calling for affluent recipients to pay more for Medicare coverage.

President Obama has provisionally accepted these changes to entitlements if the Republicans agree to new taxes. In that regard, the President has proposed a number of tax changes to raise additional revenue. Changes of particular interest to investors are outlined below.

Imposition of the “Buffett” rule

Taking a cue from Warren Buffett (who notes that he pays tax at a lower rate than does his secretary), the President is proposing a minimum tax rate of 30% on affluent taxpayers. The minimum tax rate would begin to apply to taxpayers with adjusted gross income of $1 million. This tax rate would effectively eliminate for millionaires the benefit of the lower tax rates for dividends and capital gains income. (The minimum tax due under the Buffett rule would be reduced by a portion of any charitable contributions made.)

The Republicans controlling the House are almost certain to block any imposition of a minimum tax rate, so the prospects for enactment of the Buffett rule appear dim.

 

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