Wednesday, December 22, 2010

Tax Cut Extension: What a Great Present: Who Gets the Bill?

December 22, 2010.  I’m of course delighted that the tax cuts have been extended for two years. My version was that the economic recovery was moving along too slowly, and the uncertainty of taxes left everyone in a state of pessimism and conservative fiscal policy. So now, for two years, we at least know what our tax system looks like in a general sense. We can continue to look at dividends and capital gains with special rates; we can plan for our tax bill and make decisions based on at least some certainty. I wanted certainty, and as the old saying goes, be careful of what you wish for. Because along with the normal extension of the tax cuts to everyone, we got an unemployment extender, and a new estate tax law.

I did view with amusement how the media portrayed this as a ‘tax cut for the rich’ when the actual vote and deal was an extension of current tax rates to everyone, and a ‘tax holiday’ to everyone who pays into Social Security. In the normal fashion of politic-making (which along with sausage making is something you really don’t want to see the process of), Congress decided that the Social Security system didn’t really need the money and gave all workers a 2% cut in their share of FICA taxes. Now don’t get me wrong, I’ll get 2% of $106,800 in my hands, and I like money as much as anyone else. But, if someone makes up to $106,800, they get a 2% tax cut, if someone makes $500,000, they get a 0.4% tax cut. So a $100,000 income person is 2% better this year, a $500,000 income person is 0.4% better this year. That sounds like a middle income tax cut to me (which I approve of, by the way).

Another thing about the Bill I found interesting and good was the estate tax. The new estate tax for the next two years is a 35% tax on estates over $5 million. That means that married couples can shelter up to $10 million if they do their estate plans correctly (if you know people with $10 million who want to know how to do it correctly, have them call us). The media and parts of the Congress went crazy about ‘tax cuts for the very wealthy’. Now, to get the facts straight, last year Congress had the opportunity to pass a new estate tax law, and the front contender was a $3.5 million limit per person with 45% tax. They failed to pass it, and as a result, the estate tax went away totally in 2010. No tax. So George Steinbrenner and Dan L Duncan were billionaires and their estates have no tax. Help me out on this one: if the rate goes from zero to 35%, isn’t that an increase?

Enough griping, we can see that on any cable news channel. The sad fact is that we still have a deficit on a scale that is absolutely mind-boggling. The deficit is estimated at about $1,500,000,000,000.00. So if every one of the 138 million taxpayers chipped in an equal share (never mind that half the taxpayers don’t pay any tax, or get money back they didn’t pay in), of $11,000 apiece, we could balance the budget. What I’m suggesting is that we have a looming, very ugly problem in the form of the deficits. Consider this: If you cut ALL government spending except defense, Social Security, Medicare, and Interest on the National Debt, you’d still have about a $400 Billion deficit.

So the tax bill is like a nice Christmas present someone bought us with our own credit card. We like it, we think it’s great. But the bill will be coming. I think it’s operative that the congress extended the tax bill until 2012. In the Health Care bill, there are hundreds of changes, but none in 2012. Gee, I wonder why. Could it be an election year? It’s crucial we get out of the economic malaise. But beware the cure, it’s going to be painful.