Many uncertainties face the U.S. economy, including the European debt crisis and turbulance in the Middle East which has placed upward pressure on oil prices. Lawmakers in Washington face the daunting task of addressing tax reform and big spending decisions after the November election - the fate of the Bush tax cuts and some $100 billion in automatic spending cuts scheduled to take effect next year.
Additionally, a decision must be made on whether to extend the payroll tax cut, extended as a temporary measure, and representing approx. $90 a month for a family with a mediam income level. Even if Congress extends the Bush-era income tax cuts, 160 million Americans will see their taxes go up in 2013 if the payroll tax cut is allowed to expire and rates return in January to 6.2 percent from the current rate of 4.2 percent. Concern is mounting in Washington over diverting revenue from Social Security to help pay for the cut.
The White House has signalled that the payroll tax cut is not a Democratic priority and was only intended as a temporary step, yet several different economic models say allowing the cut to expire would pull $120 billion from taxpayers' wallets and subtract about 0.3 percentage points from gross domestic product growth next year.
Capital gains could play a large role in tax reform discussions. A joint hearing held between the U.S. House of Representatives Ways and Means Committee and Senate Finance Committee this week is indicative of the fact that discussions are ongoing between the two chambers, yet there are differing views either side of the political spectrum.
The chairman of the House committee, Rep. David Camp (R-Mich.) said that "capital gains deserve to be kept at a lower rate because in a sense they are often subject to a double layer of taxation. In the case of shares of stock, a company's income is first taxed at the corporate rate, then when shareholders of the company later decide to sell their stock, they are subject to capital gains tax on the sale." The point being that the stock's value was already reduced by the fact that the company had already lost some value due to paying some of its earnings in taxes.
Senator Max Baucus (D-Mont.) said, "most of the time that claim doesn't prove true," noting that only a third of capital gains come from sales of corporate stock. Baucus outlined several reasons to consider increasing the capital gains tax rate from its current top level of 15 percent, the upshot of which was an issue of equality. Baucus said "last year, capital gains represented half the income of the top .1 percent of earners, but three percent for the lowest 80 percent of taxpayers. Low capital gains rates are the main reason why many wealthy individuals pay lower tax rates than middle class families."