Gauging the Impact of Obama's Proposed Tax Plan: Part II

Employers and employees each pay 7.5% of the first $106,800 of income for 2010, Speiss explains. The income subject to that tax could increase for 2011 by about 3%, to "about $110,000" and with the OASDI part another 50 basis points, "so saying you're giving the middle class a tax cut I could argue is disingenuous because if the Medicare, Social Security OASDI tax is always increasing about 3% a year, you're really not" giving a full tax cut.

"The president's proposal, increasing the rate to 39.6% for only those above $250,000 only reduces the forecasted deficit by 17% or 18%," per the estimated 2020 deficit, Speiss asserts. "If the Bush tax cuts were allowed to continue, it would cost another $3.3 trillion; if the president's plan were incepted, you're still looking at something around $2.3 trillion" added to the $10 trillion deficit estimate for 2020.

So the question also comes down to: Is it better–for job creation, the economy–to extend these tax cuts now, and pay down a higher deficit later, or to let these tax cuts expire now, for at least some of the population, and pay off a lower deficit later?

Using congressional and OMB's estimates, Speiss projects: "If we are in 2020 under a scenario of repealing the Bush tax cuts in full, the deficit would be roughly $10 trillion. But in that year, it's forecasted that Social Security, and Medicare and defense spending will be 106% of revenues…What happens if we let the Bush tax cuts stay in place? Now you've just gone to $13.2 trillion; you've bumped it by 30%; not a good answer. Tell me what would that number would be if we went with the President's plan? Now you're at $12.2 trillion–you're only saving about 18% compared to it would cost of you let the Bush plan stay in place. It's causing at least a 22% increase in the deficit," according to Speiss, when it's already projected that the budget will be under water when it comes to Social Security, Medicare and defense spending.

If a tax cut is extended for the middle class, will they spend what they are not paying in taxes? At EisnerAmper, Speiss says, they are studying whether "by going with the President's plan, is there a silver lining we're not considering? If you agree that it bumps up the deficit by another 22%–still not a great answer, could you say it's really not that bad because you're giving the middle class a tax cut and they now have that disposable income to spend on the economy–buy things? One could argue that that spending by the middle class will end up in the economy and act a s a stimulus and it is true, intuitively that is, that if you give a tax cut to the top earners–top 2%–they're going to invest, they're not going to spend it, and it's not going to make its way back into the economy."

Does the pick-up in the velocity of money by extension of the Bush cuts to the middle class result in a velocity of money jump that offsets the $2.3 trillion addition to the deficit in 2020? "I don't think anyone has stopped to put pen to paper and figure out, from a growth in the economy perspective, would the deficit shrink by either of those two cuts," says Speiss. Stay tuned.

Comments? Please send them to [email protected]. Kate McBride, AIF^(R), is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.