At Pace University’s Lubin School of Business, professor and tax attorney Philip Cohen gave a mixed review of the Taxpayer Relief Act passed by Congress that staved off the economy’s plunge over a fiscal cliff shaped by a scheduled end to tax cuts and sharply reduced across-the-board government spending at the start of the new year.
At the Jerome Levy Forecasting Center in Mount Kisco, economist and company chairman David Levy in a post-New Year’s Day bulletin was calling the widely forecast cliff – or the mini-cliff he had anticipated as a possible outcome in December – a “fiscal pothole” instead in the wake of the tax legislation.
“We dodged a bullet,” said Cohen, a retired vice president and general tax counsel for Unilever United States Inc. “It’s not as bad as it could be. But I don’t like it as tax policy.”
“I’m glad sequestration was postponed, “he said. “Now we pushed off everything to March, so we have to go through it again” in the battle over spending reductions that pits Republicans in Congress against Democrats and the Obama administration.
“I’m disappointed that so-called ‘grand bargain’ wasn’t concluded with some spending cuts and the lifting of the debt ceiling,” he added.
Cohen, a tax professor in the Pace business school’s legal studies and taxation department, said the enacted tax changes have “both positive and negative aspects. I’m glad both that the lower tax rates for most Americans were extended and that a higher tax rate was reinstituted for higher income taxpayers.”
But he said the income level triggering the higher 39.6 percent tax rate – up from 35 percent in 2012 – perhaps should have been set higher than the $400,000 threshold for individuals and $450,000 for married couples approved by Congress. A better level would have been in the $700,000 to $1 million range, he said.
He said the tax rate hike for high-income Americans could have been kept at less than 39.6 percent “at least for 2013 when we’re still battling a recession.”
Cohen was pleased that the bill set a rate distinction between capital gains and dividend income and ordinary income. The bill raised tax rates from 15 percent to 20 percent for capital gains and dividend income exceeding $400,000 for individuals and $450,000 for couples.
“As a matter of tax policy I question the inclusion of a limit on itemized deductions, especially one kicking in for upper middle-class taxpayers,” he said. The bill limits itemized deductions and phases out the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
Still, “It could have been a lot worse,” he said. “They could have capped deductions at $50,000.” In a November op-ed piece, Cohen claimed such an arbitrary cap would unfairly affect upper middle-class taxpayers in states with high tax rates such as New York and California.
Both Cohen and Levy pointed to the potential negative impact on the economy of the expired payroll tax reduction for employees. Congress allowed a 2 percent rise in the payroll tax on income, from 4.2 percent to its previous 6.2 percent level.
“If I had been in Congress, I think that I would have pushed to extend that,” said Cohen. “There seemed to be no real push to extend it. I think one more year (of reduced payroll deductions) would have made sense to spur growth and aid recovery.”
In Mount Kisco, Levy called the expiration of the two-year partial payroll tax holiday the most significant reduction in fiscal stimulus in the cliff-averting legislation. He said the increased tax burden is regressive because the payroll tax rates are capped “and will mostly affect workers who have a high propensity to spend each marginal dollar of income.”
Levy in his Jan. 2 bulletin said the one-year renewal of extended unemployment benefits was “one big surprise” in the bill. Though it amounts to only about $30 billion, it will have a high impact on spending in the economy, he said, as persons unemployed for long periods “tend to lack the financial cushions to cut into saving” when their extended benefits end.
Levy called the lack of spending cuts in the legislation “a smaller surprise.” Government spending cuts tend to have a high negative impact on profits, he said. “If there is a sizable impact on spending in 2013, it will hurt the economy, but unless and until that possibility rears its head, we assume there will be no further 2013 spending cuts.”
Levy said the bill’s fiscal tightening totals nearly $200 billion. But the negative effect on profits is likely to be more in the $100 billion to $125 billion range.
“This represents a blow to the economy, but not one that will by itself end the expansion.”