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Senate's Lame Ducks Delay Tax Debate

It is no shocker that the Senate delayed its vote on extending the Bush Tax Cuts till after the election.

But this delay is just adding to the uncertainty hanging over the U.S. economy. Our great country is sick. She's bloated from drinking too much from the debt well and we have politicians on both sides of the aisle fighting like children and pushing back the inevitable vote.

While this finger pointing, "I'm rubber, you're glue" game is played on Capitol Hill, there are new taxes coming down the pike next year that will impact Middle America, the very taxpayers that President Obama says he wants help.

Pete Sepp, Executive Vice President of the National Taxpayers Union (NTU) tells me while the focus is on the 2001 and 2003 tax cuts, there are new tax problems looming for the middle class.

"Thanks to the new health care law, you already have middle class tax increases on the way," Sepp says. "I'm not sure if many people don't realize but in addition to the 1099 reporting, medical expense deductions will be sharply curtailed when the health care law is up and running.

There will be limits on flexible spending accounts that will come into effect next year. Not only will you be limited to how much tax free contributions you can make for medical expenses but you'll also have to get prescriptions for over the counter medicines. That's not only time lost on the consumers part but also the doctors part as well which could mean rate increases."

Sepp went over some numbers with me. He said if you look at the amount of people claiming the flexible spending deduction, there are a little over 10 million people and around 90 percent of them are well below the $250 thousand income threshold. They are effectively having their taxes raised.

The impact of the taxes are still unknown because it hasn't happened yet, but with the middle class already being squeezed how much more can they take? The other big question mark in this tax problem is how much of small business will be lumped into the $250,000 bracket.

According to Sepp, the numbers are big.

"When you look at the statistics from NFIB, they say firms that have anywhere between 20-250 people will be the ones most effected in paying the higher tax bracket. You juxtapose those numbers against the census bureau data, and they say firms between 20-299 employees account for one out of four jobs in the United States," Sepp says.

"Now that's not a precise perfect comparison, but when you take a look at that data, you realize if one out of four jobs reside in businesses that will be directly effected by the tax increases, you are talking about a very large cross section of American employment."

The NTU recently sent a letter to Congress with 300 signatures from economists all supporting the extension of the Bush Tax cuts. The fragile state of the US economy is one of the reasons why some say it feels too premature to have them expire.

Donald Marron, former Acting Director of the Congressional Budget Office (CBO), Member of the President’s Council of Economic Advisers (CEA) and Executive Director of Congress’s Joint Economic Committee (JEC) told me the tax cuts should be extended for everyone for a year.

After that it might be appropriate to renew the debate.

"At that point we'll know who's in control of Congress, we'll be a little further away from elections and we'll be able to focus on the cuts economic impact if eliminated. But that's not to say extending tax cuts is the best way to stimulating a weak economy," Marron says.

Diane Swonk, chief economist for Mesirow Financial, also supports a temporary extension of the Bush tax cuts.

"My argument for temporarily extending the tax cuts (by a year) is not in their virtue, but in the potential harm that could come by letting them expire at this fragile stage of the recovery. I am particularly worried about how an expiration of the high-end tax cuts could distort investor behavior and, in response, financial markets before year-end," Swonk says.

Marron says Congress needs to look at the big picture when it comes to tax reform.

"Sometimes I worry that the focus is on the deficit, which I think is very important, but it crowds out the larger discussion we should be having and that's rethinking our tax code entirely," says Swonk.

"We need a clean sheet of paper and ask what do we want the government to do, how much is it going to cost, and the figure out a tax system that would finance that. In the long run the debate over tax cuts will be a historical foot note. We need to move to a tax system where there are lower tax rates but a broader base."

Swonk added: "I would like to see income taxes simplified, with rates lowered and deductibles eliminated, so as not to distort behaviors so much, but am not confident that will occur. Eventually, we will have to deal with the fundamental mismatch between government revenues and spending, something neither party has shown much leadership on in recent years."

Based on the tabling of the tax cut battle till after the election, it appears that the politicians are more concerned about saving their own jobs than taking action to help incentivize job creation for the thousands out of work.



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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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