WASHINGTON — Congressional negotiators held what were described as “productive” talks Tuesday afternoon in an effort to pass a spending measure that would cut tens of billions of dollars from the federal budget. But with just days remaining before the federal government runs out of money, there was only muted optimism that lawmakers would be able to avert a government shutdown.

The above paragraph was ripped from the headlines on Wednesday April 6th

What do you make of all this talk?

You can turn on any cable channel and the coverage is 24/7. The American press seems to be obsessed with the moment.

Japan??? ………That happened over a month ago

Libya…….That sound bite may last 30 seconds

Now we are faced with a Government shutdown!!!!….

Is it possible?

Will it happen?

I found myself being drawn to this topic. Numbers are constantly being discussed.

What are we really dealing with?

Can we just focus on making cuts to 12% of the budget and tackle the deficit issues?

What about the sacred cows!!!!!!

Defense….Social Security….Medicare…..Medicaid

Let’s look at some numbers:

On February 14, 2011, President Obama released his 2012 Federal Budget.

The report updated the projected 2011 deficit to be $1.645 trillion.

This is based on estimated revenues of $2.173 trillion and outlays of $3.818 trillion.

Observations

The federal deficit of $1.645 trillion is for 1 year (2011)

The federal deficit of $1.645 trillion is 75.7% of the $2.173 trillion total revenue the Government brought in last year.

The US Government is currently funding only 56.9% of their current expenses ($3.818 trillion) with the total revenue they received ($2.173 trillion).

The federal deficit of $1.645 trillion helps fund 43.1% of the $3.818 trillion in expenses.

You hear Congress arguing over whether to cut $30 billion or $40 billion in expenses.

That number may seems like a large amount, but what is it in the scheme of things?

Let’s take a quick look at where we are spending this money.

The federal budget in 2011 was projected at $3.83 trillion in total spending.

Below is a breakdown of the budgeted expenses for 2011. (This budget has never been passed, yet!!!)  

Obama’s new 2012 budget calls for reducing these cost by $12 billion dollars to $3.818 trillion from the proposed 2011 figure of $3.83 trillion.

You can now……. all play along….

Where do you want to take the $12 billion from?

$787.6 billion in pensions, $898 billion in health care expenditures, $140.9 billion for education, $928.5 billion in defense spending, $464.6 billion in welfare spending, $57.3 billion in protective services such as police, fire, law courts, $104.2 billion for transportation, $29 billion in general government expenses, $151.4 billion in other spending including basic research, and          $250.7 billion on interest payments.

Let’s not get too aggressive…..

What are our options?

 

How do we reduce cost and lower the deficit?

There is some talk of cutting all the expenses, 5%  across the board.

They’ll be no discrimination, everyone will take a hit.

That would reduce overall cost by $190.9 billion.

Guess what…..

the deficit would still be $1,454.1 trillion for this year.

Now what?

…………..I’m thinking…….I’m thinking

More factors to think about

 

The overall deficit is just under $15 trillion,

Our existing $1.645 trillion deficit makes up just under 11% of the overall deficit.

Recently, Robert Gates said the Pentagon has identified $178 billion in cuts for the five years from fiscal year 2012 to 2016. The Pentagon plans to reinvest about $100 billion of that into its own services, leaving the remainder for deficit reduction.

Hmmmmm!

Gates can identify $178 billion in cuts but wants to keep 57% of it?

This week, Portugal was looking to raise money by selling 6 month T -Bills for 5.117%.

Just 60 days ago the same T Bill was selling for 2.984%.

The US is currently selling T Bills for under 0.5%.

What do you think will happen if there is a Government shutdown?

There is the looming question of raising the debt ceiling.

How long before the world loses confidence in our ability to control cost?

Somehow I think we really took our eye off the ball.

Just this morning, experts were discussing the fact that the Government is expected to run with a deficit,

But……. $4 to $5 trillion is a more acceptable number.

How do we get from $15 trillion to $5 trillion?

Let’s try cutting the deficit by $1 trillion a year.

That means ………

In 10 years we can be within the acceptable numbers.

If we have already budgeted for a deficit of $1.645 trillion; to save $1 trillion this year, we would have to cut expenses $2.645 trillion dollars.

That means, we cut expenses from $3.818 trillion to $1.173 trillion.

We would only have to cut expenses by 70%!!!!

That doesn’t sound too promising!

How about we take 20 years to get the deficit from $15 trillion to $5 trillion?

Then we would only have to cut expenses 35%.

Do I hear 30 years?

Where am I going with all this fuzzy math?

I wish I knew!!!

No one seems to want to stand up and address any of these questions?

Ask anyone, we already feel we pay our fair share of taxes.

Can the American public be asked to pay more?

If you want to get reelected,

you better not be talking about raising taxes!

Cut our taxes but don’t dare cut our programs….

Is the US Government up for the challenge?

Will they be able to make the tough choices?

Or will the push the ball forward.

At HBS we pride ourselves on providing Smart Solutions for Smart Business

I am not sure where we would place this budget category?

I am just trying to make some sense of it.

Your comments are welcomed.

You may email george@hbsadvantage.com

Visit us on the web www.hutchinsonbusinesssolutions.com

 

Written by

Martin Feldstein

CAMBRIDGE –The tax package agreed to by President Barack Obama and his Republican opponents in the United States Congress represents the right mix of an appropriate short-run fiscal policy and a first step toward longer-term fiscal prudence. The key feature of the agreement is to continue the existing 2010 income-tax rates for another two years with no commitment about what will happen to tax rates after that.

Without that agreement, tax rates would have reverted in 2011 to the higher level that prevailed before the Bush tax cuts of 2001. That would mean higher taxes for all taxpayers, raising tax liabilities in 2011 and 2012 by about $450 billion (1.5% of GDP).

Because America’s GDP has recently been growing at an annual rate of only about 2% – and final sales at only about 1% – such a tax increase would probably have pushed the US economy into a new recession. Although the new tax law is generally described as a fiscal stimulus, it is more accurate to say that it avoids a large immediate fiscal contraction.

The long-term implications of the agreement stand in sharp contrast both to Obama’s February 2010 budget proposal and to the Republicans’ counter-proposal. Obama wanted to continue the 2010 tax rates permanently for all taxpayers except those with annual incomes over $250,000. The Republicans proposed continuing the 2010 tax rates permanently for all taxpayers. By agreeing to limit the current tax rates for just two years, the tax package reduces the projected national debt at the end of the decade (relative to what it would have been with the Obama budget) by some $2 trillion or nearly 10% of GDP in 2020.

That reduction in potential deficits and debt can by itself give a boost to the economy in 2011 by calming fears that an exploding national debt would eventually force the Federal Reserve to raise interest rates – perhaps sharply if foreign buyers of US Treasuries suddenly became frightened by the deficit prospects.

The official budget arithmetic will treat the agreement on personal-income tax rates as a $450 billion increase in the deficit, making it seem like a big fiscal stimulus. But the agreement only maintains the existing tax rates, so taxpayers do not see it as a tax cut. It would be a fiscal stimulus only if taxpayers had previously expected that Congress and the administration would allow the tax rates to rise – an unlikely prospect, given the highly adverse effects that doing so would have had on the currently weak economy.

Even for those taxpayers who had feared a tax increase in 2011 and 2012, it is not clear how much the lower tax payments will actually boost consumer spending. The previous temporary tax cuts in 2008 and 2009 appear to have gone largely into saving and debt reduction rather than increased spending.

It is surprising, therefore, that forecasters raised their GDP growth forecasts for 2011 significantly on the basis of the tax agreement. A typical reaction was to raise the forecast for 2011 from 2.5% to 3.5%. While an increase of this magnitude would be plausible if a forecaster had previously expected tax rates to increase in 2011, it would not have been reasonable to forecast 2.5% growth in the first place with that assumption in mind. So, either the initial 2.5% forecast was too high or the increase of one percentage point is too large.

What is true of the agreement is also true of the decision, as part of that agreement, to maintain unemployment insurance benefits for the long-term unemployed. This, too, is essentially just a continuation of the status quo. No new benefit has been created.

The most substantial potential boost to spending comes from a temporary reduction of the payroll tax, lowering the rate paid by employees on income up to about $100,000 from 6.2% to 4.2%. But, while the decline in tax payments will be about 0.8% of GDP, it is not clear how much of this will translate into additional consumer spending and how much into additional saving. Because this tax cut will take the form of lower withholding from weekly or monthly wages, it may seem more permanent than it really is, and therefore have a greater impact on spending than households’ very feeble response to the previous temporary tax changes.

The final component of the agreement is temporary acceleration of tax depreciation, allowing firms in 2011 to write off 100% of capital investment immediately, in contrast to the current rule, which stipulates a 50% immediate write-off, followed by depreciation of the remaining 50% over the statutory life of the equipment. But, at a time when interest rates are very low and large businesses have enormous amounts of cash on their balance sheets, this change in the timing of tax payments is not likely to do much to stimulate investment.

A greater stimulus to business investment may come from the perception that Obama’s agreement to extend the personal-income tax cuts for high-income individuals signals his administration’s reduced antagonism to business and the wealthy. Obama’s recent statement that he favors reforming personal and corporate taxes by lowering rates and broadening the tax base reinforces that impression. Let’s hope that’s true.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan’s Council of Economic Advisers, and is former President of the National Bureau for Economic Research.

Copyright: Project Syndicate, 2010.
http://www.project-syndicate.org

More Savings If You Have Young Children Or Attend College

STEPHEN OHLEMACHER, Associated Press

WASHINGTON — It’s the most significant new tax law in a decade, but what does it mean for you? Big savings for millions of taxpayers, more if you have young children or attend college, a lot more if you’re wealthy.

 The package, signed Friday by President Barack Obama, will save taxpayers, on average, about $3,000 next year.

 But many families will be able to save much more by taking advantage of tax breaks for being married, having children, paying for child care, going to college or investing in securities. There are even tax breaks for paying local sales taxes and using mass transit, and a new Social Security tax cut for nearly every worker who earns a wage.

Most of the tax cuts have been around since early in the decade. The new law will prevent them from expiring Jan. 1. Others are new, such as the decrease in the Social Security payroll tax. Altogether, they provide a thick menu of opportunities for families at every income level.

“The tax code wants to encourage people to invest in their homes, invest in their education, invest in their retirement, and you have to know about all of these in order to take advantage of it,” said Kathy Pickering, executive director of The Tax Institute at H&R Block.

The law extends most of the tax cuts for two years, including lower rates for the rich, the middle class and the working poor, a $1,000-per-child tax credit, tax breaks for college students and lower taxes on capital gains and dividends. A new one-year tax cut will reduce most workers’ Social Security payroll taxes by nearly a third next year, from 6.2 percent to 4.2 percent.

A mishmash of other tax cuts will be extended through next year. They include deductions for student loans and local sales taxes, and a tax break for using mass transit. The alternative minimum tax will be patched, sparing more than 20 million middle-income families from increases averaging $3,900 in 2010 and 2011.

The $858 billion package also includes $57 billion in renewed jobless benefits for the long-term unemployed.

“I am absolutely convinced that this tax cut plan, while not perfect, will help grow our economy and create jobs in the private sector,” Obama has said. “It will help lift up middle-class families, who will no longer need to worry about a New Year’s Day tax hike. … It includes tax cuts to make college more affordable, help parents provide for their children, and help businesses, large and small, expand and hire.”

At the request of The Associated Press, The Tax Institute at H&R Block developed detailed estimates for how the new law will affect families at various income levels next year:

-A single taxpayer making $50,000 a year who rents an apartment and pays $3,500 in college tuition and fees would save $2,280 in income taxes and $1,000 in Social Security taxes – a total of $3,280.

-A married couple with two young children, some modest investments and combined wages of $100,000, would save $6,256 in income taxes and $2,000 in Social Security taxes – a total of more than $8,200.

Income taxes would be lower because of the lower rates, a $1,000 per child tax credit and a $1,200 tax credit for child care expenses. The couple earns $2,000 in dividends but it would be tax-free at their income level. Wealthier investors would pay a top tax rate of 15 percent on dividends. The couple would also be spared from paying the alternative minimum tax, and would pay lower Social Security payroll taxes.

-A married couple with a child in high school and another in college, combined wages of $170,000 and larger investments would save nearly $7,800 in income taxes and $3,400 in Social Security taxes – a combined savings of nearly $11,200.

Income taxes would be lower because of the lower rates and more generous deductions for state and local income taxes, property taxes, mortgage interest and charitable donations.

Assuming the couple earned $4,000 in qualified dividends and $5,000 in capital gains, that income would be taxed at 15 percent, instead of the higher rates that would have taken effect without the new law.

At their income level, the couple wouldn’t qualify for the child tax credit and would get only $125 from the education tax credit. However, they would save more than $3,600 because they would be largely spared from the AMT.

“One thing generally about the higher income taxpayers is that even though they have a lot of opportunities, they also phase out of a lot of benefits that are designed for lower- to middle-income taxpayers,” said Gil Charney, principal tax analyst at The Tax Institute at H&R Block.WASHINGTON — It’s the most significant new tax law in a decade, but what does it mean for you? Big savings for millions of taxpayers, more if you have young children or attend college, a lot more if you’re wealthy.

The package, signed Friday by President Barack Obama, will save taxpayers, on average, about $3,000 next year.

But many families will be able to save much more by taking advantage of tax breaks for being married, having children, paying for child care, going to college or investing in securities. There are even tax breaks for paying local sales taxes and using mass transit, and a new Social Security tax cut for nearly every worker who earns a wage.

Most of the tax cuts have been around since early in the decade. The new law will prevent them from expiring Jan. 1. Others are new, such as the decrease in the Social Security payroll tax. Altogether, they provide a thick menu of opportunities for families at every income level.

“The tax code wants to encourage people to invest in their homes, invest in their education, invest in their retirement, and you have to know about all of these in order to take advantage of it,” said Kathy Pickering, executive director of The Tax Institute at H&R Block.

The law extends most of the tax cuts for two years, including lower rates for the rich, the middle class and the working poor, a $1,000-per-child tax credit, tax breaks for college students and lower taxes on capital gains and dividends. A new one-year tax cut will reduce most workers’ Social Security payroll taxes by nearly a third next year, from 6.2 percent to 4.2 percent.

A mishmash of other tax cuts will be extended through next year. They include deductions for student loans and local sales taxes, and a tax break for using mass transit. The alternative minimum tax will be patched, sparing more than 20 million middle-income families from increases averaging $3,900 in 2010 and 2011.

The $858 billion package also includes $57 billion in renewed jobless benefits for the long-term unemployed.

“I am absolutely convinced that this tax cut plan, while not perfect, will help grow our economy and create jobs in the private sector,” Obama has said. “It will help lift up middle-class families, who will no longer need to worry about a New Year’s Day tax hike. … It includes tax cuts to make college more affordable, help parents provide for their children, and help businesses, large and small, expand and hire.”

At the request of The Associated Press, The Tax Institute at H&R Block developed detailed estimates for how the new law will affect families at various income levels next year:

-A single taxpayer making $50,000 a year who rents an apartment and pays $3,500 in college tuition and fees would save $2,280 in income taxes and $1,000 in Social Security taxes – a total of $3,280.

-A married couple with two young children, some modest investments and combined wages of $100,000, would save $6,256 in income taxes and $2,000 in Social Security taxes – a total of more than $8,200.

Income taxes would be lower because of the lower rates, a $1,000 per child tax credit and a $1,200 tax credit for child care expenses. The couple earns $2,000 in dividends but it would be tax-free at their income level. Wealthier investors would pay a top tax rate of 15 percent on dividends. The couple would also be spared from paying the alternative minimum tax, and would pay lower Social Security payroll taxes.

-A married couple with a child in high school and another in college, combined wages of $170,000 and larger investments would save nearly $7,800 in income taxes and $3,400 in Social Security taxes – a combined savings of nearly $11,200.

Income taxes would be lower because of the lower rates and more generous deductions for state and local income taxes, property taxes, mortgage interest and charitable donations.

Assuming the couple earned $4,000 in qualified dividends and $5,000 in capital gains, that income would be taxed at 15 percent, instead of the higher rates that would have taken effect without the new law.

At their income level, the couple wouldn’t qualify for the child tax credit and would get only $125 from the education tax credit. However, they would save more than $3,600 because they would be largely spared from the AMT.

“One thing generally about the higher income taxpayers is that even though they have a lot of opportunities, they also phase out of a lot of benefits that are designed for lower- to middle-income taxpayers,” said Gil Charney, principal tax analyst at The Tax Institute at H&R Block.

As reported in Huffington Post 12/17/10

The Associated Press | 12/17/10 04:03 AM | AP

//

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Highlights of the tax package passed by Congress late Thursday and sent to President Barack Obama. It would cost about $858 billion; most provisions, which were to expire Jan. 1, would be extended for two years, unless noted.

The package extends:

_Lower rates for taxpayers at every income level. The top rate, on taxable income above $379,150, would stay at 35 percent, instead of increasing to 39.6 percent. The bottom rate, on taxable income below $8,500 for individuals and $17,000 for married couples, would stay at 10 percent, instead of increasing to 15 percent. Cost: $186.8 billion.

_More generous itemized deductions for high-income households. Cost: $20.7 billion.

_A more generous $1,000 child tax credit. Cost: $71.7 billion.

_Marriage penalty relief, increasing the standard deduction for married couples. Cost: $18 billion.

_A more generous Earned Income Tax Credit for low-income families. Cost: $15.7 billion.

_A series of tax breaks for students and their families, including interest deduction for student loans and an exemption for employer-provided educational assistance. Cost: $3.3 billion.

_A deduction for tuition and related expenses for higher education, for 2010 and 2011. Cost: $1.2 billion.

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_A tax credit of up to $2,500 for students’ higher education expenses. Cost: $17.6 billion.

_The top capital gains tax rate of 15 percent. Cost: $25.9 billion.

_The top tax rate on dividends of 15 percent. Cost: $27.3 billion.

_Through 2011, enhanced jobless benefits for people who have been unemployed for long stretches. Cost: $56.5 billion.

_A series of incentives for selling, using and producing alternative fuels, including ethanol. Many of the provisions expired at the end of 2009. They would be extended through 2011. Cost: $11.3 billion.

_A $250 deduction for out-of-pocket classroom expenses by teachers, for 2010 and 2011. Cost: $390 million.

_A federal income tax deduction for state and local sales taxes, taken mostly by people who live in the nine states without state income taxes, for 2010 and 2011. Cost: $5.5 billion.

_The ability of older Americans to withdraw up to $100,000 a year from Individual Retirement Accounts, tax-free, to donate to certain public charities, for 2010 and 2011. Cost: $979 million.

_A business tax credit for research and experimentation expenses, for 2010 and 2011. Cost: $13.3 billion.

_Tax breaks for capital improvements to restaurants and other retail buildings, for 2010 and 2011. Cost: $3.6 billion.

_A tax break for active investors in foreign-based banking, securities and insurance firms, for 2010 and 2011. Cost: $9.2 billion.

_Increased depreciation and expensing for capital investments by businesses. Cost: $21.8 billion.

The package also:

_Spares more than 20 million middle-income households from tax increases averaging $3,900 from the Alternative Minimum Tax in 2010 and 2011. Cost: $136.7 billion.

_Imposes a lower estate tax for the next two years, allowing couples to pass estates as large as $10 million to heirs tax-free. The balance would be taxed at 35 percent. Cost: $68.1 billion.

_Provides a one-year Social Security tax cut for all wage earners, from 6.2 percent to 4.2 percent. Cost: $112 billion.

___

Source: Joint Committee on Taxation