PhillyDeals: Mushy middle won on keeping tax cuts

Conservative Republicans and liberal Democrats joined in opposing the tax cuts orchestrated by

President Obama

and

Sen. Mitch McConnell (R., Ky.)

, but those groups were outvoted by the mushy middle from both parties in the House of Representatives last week.

With votes from a couple of dozen Democrats who won't be coming back to Capitol Hill offices except in future careers as private lobbyists, Obama quickly signed the "Lame Duck Act for Financial Stability" or LAFFS, as Guy LaBas, a Janney Montgomery Scott L.L.C. bond strategist, called it.

The extension of the George W. Bush-era personal and business tax cuts, with a few big changes, is supposed to pump more than $800 billion into taxpayers' pockets, almost as much as the controversial Obama tax-cut-and-spending stimulus of two years ago.

"The winner is clearly the U.S. economy," as lower taxes help "jump-start confidence, and therefore hiring," Janney managing director Alan Schankel told clients in a report. Poor consumers, who got a payroll tax cut, are most likely to spend more than they would if the cuts had expired, he added.

"The losers are proponents of fiscal conservatism," since tax cuts prove that politicians' "claims of budget cutting aren't translating into real action," Schankel added.

The tax cuts were a repudiation of Obama's own deficit-busters commission, which had just gotten done recommending a series of tax increases and Social Security and Medicare eligibility cuts, geared largely to the rich, but also raising the retirement age to 69.

Nick Crocetti, a tax director at national accounting firm CBIZ MHM L.L.C., of Philadelphia, read the commission's detailed report. It made him sleepy, but he was impressed: "They attacked some sacred cows. They took a multiple-step approach."

While raising taxes to cut the U.S. debt and stabilize prices and the dollar, Crocetti says, the commission's plan leveled benefits more than it cut them: "People at the very low end would get a little bit more, people at the top end would come down a little."

But the retirement-age increase helped make the report deeply unpopular among people who might have supported other recommendations. Social Security defenders insist a small increase in payroll deductions would enable the plan to stay solvent for years.

Instead, Obama agreed to cut Social Security payroll taxes for one year without doing anything to cover the lost income.

In Crocetti's view, Obama failed in his mission to boost taxes on the rich because he used a government-worker definition of rich, not a Toll Bros. home-sales or a Morgan Stanley financial-adviser definition.

"$250,000 was a bad cutoff," said Crocetti, regarding the income level that separated wealthy and non-wealthy Americans.

"If he'd said $1 million, it might have been acceptable. You'd have protected a lot of professionals. The husband and wife are both working, but they're running around like crazy people with a couple of kids in day care and a mortgage to pay and taxes. They don't think they're wealthy."

A lot of those people - in places like Bucks and Montgomery and Burlington Counties - voted for Obama and put Democrats in Congress two years ago. Then Obama told them they ought to be paying more than their more modestly paid school-principal and bank-branch-manager neighbors. So a lot of them voted Republican this fall, ensuring Obama won't be able to pass anything without GOP permission until we vote on his fate in 2012.

The tax cuts will help small businesses, which have been having a tough time finding bank loans, argues Scott Balestrier, a tax managing partner at BDO's Philadelphia office.

He said the combination of lower rates, slower depreciation on business investments, and extended investment credits in the bill could result in small-business owners calling 2011 "The Year I Invest in My Business."

"Mostly, my clients want some certainty. The inability of business owners and wealthy individuals and regular individuals to figure out their tax situation has had a chilling efffect. You can't plan. We've been talking about a tax bill for six months," Balestrier added.

CBIZ's Crocetti is less optimistic: "Uncertainty remains, since it's only a two-year extension."