What does the US House bill on tax cut extension mean to you?

As expected, Democratic and Republican leaders in the US House of Representatives voted along party lines regarding the debate on the extension of the Bush-era tax cuts. The voting favored those who want an extension of the tax cuts but only for middle-income individuals and households. 

Incoming House speaker John Boehner of Ohio led the Republican move in the Congress’ lower chamber to extend the lower tax rates and expanded tax credits signed during the Bush administration, which was supposed to expire by the end of the year, but had to settle on a bill meant only for the middle class while the same measures for the wealthy were allowed to expire.

Boehner, who sees it as a political maneuvering on the part of the Democrats who want to satisfy those who oppose extending the tax cuts to the wealthy, warned that the bill will not pass in the Senate. President Barack Obama has been pushing for a limited extension of the tax cuts covering only individuals earning less than $200,000 and married couples earning less than $250,000 a year.

The Republicans, emboldened by their sweeping victory in the last elections, voted against the bill saying it will be hurtful for the economy and for higher-income taxpayers.

Essentially, the House bill means people earning within the $250,000 and $250,000 income thresholds would continue to enjoy the lower 10 to 33 percent income tax rates and 15 percent tax rate on dividend income and capital gains.

People earning beyond the threshold will have their tax rates increased in the range from 35 to 39.6 percent while capital gains tax would increase to 20 percent.

Republicans hope that the bill will be eventually killed when it goes to the Senate and are eyeing a legislation that will not impose any tax increases for anybody.

What to do with the Bush tax cuts?

Fresh from the Thanksgiving celebrations, politicians in Washington are set to meet this week to determine the future of the Bush tax cuts that are set to expire at the end of the year.    

President Obama hopes to sit down with bipartisan Congressional leaders to decide whether or not to let the tax cuts expire, which many agree will be a crucial decision considering the fragile economic recovery in the United States.

The summit, which was supposed to be held last month, is not expected to result to any finalized agreement but rather will begin a series of discussions between the Democrat president and a Republican-led Congress. Both the White House and Capitol Hill agree that raising taxes at this point would be detrimental particularly to middle income Americans.

The Democrats, who were “shellacked” in the recently held mid-term elections, earlier proposed a tax hike measure to households earning over $250,000 a year. This is especially tricky since several analysts predicted this will hit small businesses which are considered the lifeblood of the economy that is currently suffering from unemployment of near 10 percent.    

There is also much speculation whether the current “lame-duck” Congress can achieve something significant regarding the tax cuts debate although some quarters see the Bush tax cuts will be extended for another 2 years in time for the next presidential polls.

QE2 puts US under pressure in G20

Ahead of the Group of 20 (G20) meeting in Seoul, South Korea this week is a brewing war of words between several of the grouping’s major players including the United States, China, and Germany. This came after the announcement by the U.S. Federal Reserve that it was pouring $600 billion of freshly printed money into the economy by buying treasury bonds in what is commonly known as quantitative easing (QE2).

The stimulus package aims to kick start the slow U.S. economic growth but is viewed by the European Union as well as other emerging economies, including the Philippines, as a threat to their economic recovery. Analysts have predicted that these funds will eventually find its way offshore where yields are much higher because the U.S. Fed has since implemented record-low interest rates to boost domestic economic activity.

The fragile economic recovery in Europe and in the emerging economies will likely face inflationary pressures due to inflows of “hot money” from the United States and many of them have already taken precautionary measures in order to safeguard their economy. Despite criticisms from abroad, U.S. President Barack Obama has recently defended the move by the Fed saying that the recent stimulus package is crucial since it would enhance liquidity in the financial system giving incentives for banks to lend again which would lead to higher economic activity and put millions of unemployed Americans back to work again.

President Obama, fresh from a mid-term election “shellacking” of his Democratic Party allies, is now in India to forge better ties with another rising Asian power India. The South Asian country is also a member of the G20 and is seen by Obama as a strategic economic and political ally in Asia where China is fast becoming a dominant figure. Obama has called for a permanent Security Council seat for India, a foreign policy move largely seen to check the growing power of China.

Asset bubbles: Easy to predict, hard to prevent

I watched a CNBC special documentary yesterday and it was about asset bubbles. It talked about how it rampaged the Japanese economy in the 1980s, which has yet to recover, and the U.S. housing collapse which culminated to the Lehman fall of late 2008 that sparked the worst financial turmoil in U.S. history in decades.

Asset bubbles usually have the same face: inflated property prices, low inflation, and rock-bottom interest rates. Throughout man’s history since the modern financial markets were established, he has been faced with the same circumstances but almost each time still fall prey to greed and the hollow belief that all good things never last. Government, particularly the central banks, knew of the historical trends but seemingly has the tendency to get caught up with the bullish frenzy and forget their duty to protect the interest of the financial system until the bubble just simply burst in front of them.