Daily Tax Update - January 22, 2013: Ways and Means Holds Hearing on the Debt Limit

WAYS AND MEANS HOLDS HEARING ON THE DEBT LIMIT:  Today, the House Ways and Means Committee held a hearing on the debt limit. The House plans to vote Wednesday on a measure that would allow the government to make payments on its obligations until May 19.

  • Today, White House spokesman Jay Carney called the House Republicans’ temporary debt plan “a very significant development in reducing the conflict over this and reducing the fear over a process that had always had the potential spinning out of control.”  Carney said that the President would not block the measure if it passes.  Carney said that President Obama “welcomes” the decision and “would not stand in the way of the bill becoming law.”
  • In an interview yesterday, Senate Finance Committee member Charles Schumer (D-NY) said, "We Democrats have always intended to do a budget this year.”  Schumer added, “Because in our budget that we will pass, we will lift tax reform, which many of my Republican colleagues liked, but it's going to include revenues."
  • In his opening remarks at today’s hearing, Committee Chairman Dave Camp said, “As of December 31, 2012, our nation reached the current debt limit of nearly $16.4 trillion, and the Treasury Department has been using “extraordinary measures” to avoid exceeding the debt limit.  According to a letter from Secretary Geithner, those measures will be exhausted between mid-February and early March.  Camp added, “I fully expect Republicans and Democrats will disagree about what the budget should look like.  Even when one party has a majority in both the Senate and the House, the two bodies often disagree.  Disagreeing isn’t the problem – the failure to resolve those differences is.  And, how can we even start to find common ground if Senate Democrats won’t tell us where they stand in the first place?  Having the House and Senate pass a budget is the first step towards getting our finances back in shape.”
  • The witnesses at the hearing were:

Mr. Lee Casey
Partner, Baker Hostetler
Testimony

Mr. G. William Hoagland
Senior Vice President, the Bipartisan Policy Center
Testimony

Mr. J.D. Foster
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy, The Heritage Foundation
Testimony

Mr. Simon Johnson, Ph.D.
Ronald A. Kurtz Professor of Entrepreneurship, Massachusetts Institute of Technology
Testimony

  • Mr. Casey said, “There are really two questions before the Committee today, one of policy and one constitutional. The policy question involves the extent to which the so-called “debt ceiling” is a sensible place to do battle over what everyone must concede is an unsustainable level of federal spending. The second question involves the constitutional ramifications of the debt ceiling, whether there must be a congressionally mandated limit to federal borrowing, and the extent to which the President may ignore these restraints or simply raise that limit and borrow money on his own authority.”  Casey continued, “Thus, as a constitutional matter, Congress has the authority and obligation to regulate federal borrowing. It can exercise this power in a number of different ways, including by voting on individual debt issues as was the case before the First World War, or by establishing an overall limit on the amount of debt the federal government may incur without further congressional action. The President is bound by such limits. He can neither ignore the debt ceiling, nor can he ‘raise’ it on his own authority. Section 4 of the 14th Amendment does not grant the President this power. Although it forbids any repudiation or dishonoring of the existing federal “public debt,” it does not require or itself authorize new or additional borrowing.”
  • Mr. Hoagland testified, “If the U.S. goes past the X Date without an increase in the debt limit, the country should be prepared for a likely downgrade. This would most likely lead to higher interest rates on our already large borrowing portfolio, and therefore in turn, further add to an already excessive deficit. The goals for our country should be to spur economic growth and control our debt and deficit going forward; I am concerned that a prolonged dispute over the debt limit could, in fact, produce the opposite effect. For example, BPC analysis, based off of GAO modeling, estimates that the debt limit event of 2011 cost the U.S. taxpayer an additional $19 billion over 10 years from the interest rate premium that the federal government was forced to pay on its debt during that period.” Mr. Hoagland added, “We at BPC strongly believe that the imbalance in our federal ledger does need to be addressed. Prolonged negotiation over the debt limit, however, has the potential for substantial downsides to our economy – increased uncertainty, instability in the markets, disruption to individual and families’ lives – and our standing in the world as having the currency of choice. Risks are risks, and while no one can know for sure what ramifications the largely unprecedented scenario of passing the X Date would have, those risks clearly grow by day and eventually could become catastrophic. These are considerations that we hope all policymakers keep in mind as they deliberate these vital issues for the future of our country.”
  • Mr. Foster testified, “Congress faces two roughly equally drastic options: keeping the debt ceiling in place or raising the debt ceiling without any other actions to slow the growth in spending. Alternatively, if Congress ultimately inclines toward raising the debt limit, then in the same legislation it should enact substantial entitlement reforms and other spending reductions with the clear goal of putting the nation on a credible path to balance in 10 years. Fortunately, there are well-vetted options available that would not only move the budget toward balance, but also help to keep the budget in balance while preserving the major entitlement programs for future generations.”
  • Dr. Simon made several points including, “[C]ontinuing uncertainty around the U.S. federal budget in general and the debt ceiling in particular is not helpful – and may prove destabilizing both at home and around the world.  Even a partial shutdown of federal government in the United States would have a significant negative effect on the economy. The private sector – particularly small business – would be greatly damaged by any lack of clarity about when and how the government will pay for goods and services purchased or make the transfer payments promised to citizens. In addition, we have seen repeatedly over the past few years that congressional deadlock over fiscal issues worsens uncertainty and makes it harder for the private sector to make sensible decisions – including regarding the consumption of durables and all kinds of business investment.”  Dr. Simon added, “In the worst case, a failure to increase the U.S. debt ceiling would seriously and permanently undermine our standing in credit markets, increase interest rates, and worsen the budget deficit. The stock market would also likely fall sharply (and this could well happen, even if interest rates do not spike up.) Any or all of these developments would have an immediate negative effect on all parts of the private sector. The debt ceiling impasse in summer 2011 created a degree of uncertainty that was not helpful to job creation. The “fiscal cliff” stand-off at the end of 2012 was another instance of policy induced uncertainty – if the same deal had been reached six months earlier, this would have been much better for the economy than what actually transpired.”

MISCELLANEOUS GUIDANCE RELEASED:

Revenue Ruling 2013-3 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274. The rates are published monthly for purposes of sections 42, 382, 412, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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