Warning - Bush Tax Cuts

[Snaggletooth]

Discussing the ramifications of restoring, postponing, repealing, the "Bush Tax Cuts" give rise to a confusing array of items for tax preparers.

Not all the end-of-year issues are encapsulated in the infamous "Bush Tax Cuts." We will hear the fate of the Bush Tax Cuts bantered around on TV and this will be the extent of what the public knows, if even that much.

OUR BIG PROBLEM is that whatever happens to them will leave other tax issues untouched. Know which issues are the Bush Tax Cuts and which are not.

Example: Will the sales tax deductibility be extended? What about residential energy credit? R&D credit? Tuition fringes? NONE of these have ever been part of the Bush Tax Cuts, as they were legislated separately. At least a dozen of these items are expiring December 31 even if the Bush Tax Cuts are restored. If they are extended, they will have to be addressed separately.

What about the 15% ceiling on Dividends and LTCG? Ending the phase-out of itemized deductions? Reduction of tax rates and brackets? These ARE part of the Bush Tax Cuts.

Most of us are customers of The Tax Book. Note in particular their commitment to delay the publication until deep into December so they can bring us the most current publication possible. For the last several years, congressional tax haranguing has continued into December before recessing. I am not privy to the cost in dollars and cents for sitting so long on publishing, but I'm sure there is a human cost in long hours of last-minute governmental research, publication production, and getting the product out the door. It would not surprise me if this has impacted their Christmastime numerous times.

Obviously being a long-time member of the board and a Tax Book customer, I often express my appreciation for what they do. No, this is not an advertisement for their book, but there are more "December" issues this year than ever before, and I am relying heavily on their product this year to divulge which of the issues are extended, rescinded, or whatever.

Our congress has a proclivity to procrastinate. If they weren't concerned about recessing for their own Christmas they never would finish this stuff.

[FEDUKE404]

I would rather wait

Excellent post.

And I concur with the "December issues." Providers of reliable tax information, such as TheTaxBook, must be pulling their corporate hair out these days trying to decide when to start the presses.

Quite frankly, I would prefer a later version (even perhaps dragging into January) than a "regular" version which to a large extent might be obsolete before it even arrives at my doorstep.

And even with frequent "updates" from TTB, I still vote for "wait" versus "hurry."

But on a brighter note, I assume the IRS will be (is?) printing a whole bunch of forms/publications that may well be out-dated by the start of February?

FE

[Nashville]

Intact

Extrapolating from the recent elections, I would say the Bush tax cuts are "safe" to assume for tax planning. The "key" in the whole scheme is they affect rich and poor alike.

Partisan politics aside, and concentrating only on what we need to as tax students: It is clear that the Democrats/Administration cannot afford a sudden jump in tax withholding on January 1st. If the Bush tax cuts are not extended, this will happen to EVERYONE, not just those making over $250,000/yr.

None of the lawmakers in either party want this to happen, and due to the landslide earlier this month, the Administration no longer has the political capital to pick and choose which of these cuts they want to restore.

An interesting corollary to this withholding observation: What will happen to the average $14/wk withholding attributable to the "making work pay" credit? I believe this expires December 31 as well and this is a separate issue from the Bush cuts.

Many of us worry about what Congress will do to ease the deficit (I am one of those too), but that is a separate discussion.

[AZ-Tax]

Warren Buffet wants his taxes to increase...

Partisan politics aside, did you see Warren Buffet on ABC said he wants the Bush tax cuts to expires for those $250K and up. There is also a website with other millionaries and billionaires that feel the same way. http://www.fiscalstrength.com/

I dont know, if the Dems only do one vote on retaining curret tax levels for $250K or less and expire for those earning $251K or more, voting no would be a vote to increase taxes on the middle class.

[BHoffman]

Temporary Cuts for All

Partisan politics aside, did you see Warren Buffet on ABC said he wants the Bush tax cuts to expires for those $250K and up. There is also a website with other millionaries and billionaires that feel the same way. http://www.fiscalstrength.com/

I dont know, if the Dems only do one vote on retaining curret tax levels for $250K or less and expire for those earning $251K or more, voting no would be a vote to increase taxes on the middle class.

Why wouldn't those millionaires and billionaires instead want to use their money to invest in some promising entrepreneurs or open up a nice new corporation that will hire people who need jobs and make wonderful things people want to buy?

http://www.businessinsurance.com/apps/pbcs.dll/article?AID=/20100809/NEWS/100809938

There will not be only one vote on the tax cut extension. There will be at least two.

The bipartisan agreement is to temporarily extend all of the tax cuts. It seems that President Obama is seeing that writing on the wall:

http://news.yahoo.com/s/ap/us_tax_cuts_democrats

"Democratic officials said Obama did not embrace a particular approach to the tax cuts in his Oval Office meeting with Democratic leaders."

Liberal Dems want tax cuts for those making over $250k to expire.

Moderate Dems will very likely back a temporary extension of all tax cuts.

Repubs say they want a permanent extension of all tax cuts. They will certainly agree on a temporary extension.

So, I'm betting there is a temporary cut for everyone, but not until after all of the drama plays out.

[joanmcq]

Only thing is, over the last 10 years, we have not seen an increase in investing or business start-ups by those millionaires & billionaires over what was going on in the 90's when the tax rates were higher. What we have seen is a growing disparity between those at the very top and everyone else. If they weren't going to do it already, why would they start now?

I think the lack of comprehensive health care is a bigger hurdle to the start of small businesses than anything else. If you are employed by someone else, even with pre-existing conditions, your insurance is low. If you decide you want to take the plunge and start your own business you either have to be married to someone with good insurance, or pay through the nose if you can even get someone to cover you. With the new health care bill, you can get coverage, but I don't see where it has to be affordable.

[DaveO]

[QUOTE=AZ-Tax;109391]Partisan politics aside, did you see Warren Buffet on ABC said he wants the Bush tax cuts to expires for those $250K and up. There is also a website with other millionaries and billionaires that feel the same way. http://www.fiscalstrength.com/

I admire Buffets acumen as an investor but find his complaining about the tax code a bit disingenuous. BRK is essential a mutual fund since it owns all or parts of a great many different companies. It buys and sells stock and issues debt and borrows money. But since it is organized as a holding company it is not required to payout dividends or capital gains instead reinvesting the money. Sure BRK pays a bunch of tax but the shareholders pay none until they sell. Full disclosure; I own some “B” shares.

[geekgirldany]

With the new health care bill, you can get coverage, but I don't see where it has to be affordable.

That's right. Mine is going up to $700 a month. I have a grandfather in plan with Blue Cross. The big change is no lifetime maximums and they will cover 100% physicals and a few other yearly exams. Talking to Blue Cross I told them I would like to pay from $300 to $400. Agent told me "that is a lofty goal". So even if I change to another plan the price probably won't go down that much.

[David1980]

Why wouldn't those millionaires and billionaires instead want to use their money to invest in some promising entrepreneurs or open up a nice new corporation that will hire people who need jobs and make wonderful things people want to buy?

What differences does the tax rate make on that, really? If we tax them 20% instead of 15% they're going to take their money and start buying mattresses to stick it in instead of investing it? I've never understood the argument. If you can invest money and make income off it, why wouldn't you? Unless we're talking about > 100% tax rates, in which case, yeah, obviously the mattress is a good idea.

[Snaggletooth]

Health Care

I think the lack of comprehensive health care is a bigger hurdle to the start of small businesses than anything else.

Joan, we don't always agree, but your entire post was on target 100%.

Why would ANYONE want to start a business now and deal with benefits? I can't tell you how many people would quit their jobs and start a business or a consulting firm. But they have to stay on as an employee because that's the only way they can keep insurance.

Especially employees over 50. They're old enough to be independent in thought because they don't believe corporate BS anymore, and they make bad demographics for health insurance too, so many employers target people over 50 and devise retirement buyouts that aren't really voluntary. Insurance companies encourage employers to retain employees under 50, although you'll never hear any of them admit it.

A taxpayer smart enough to be making $250K per year will also be smart enough not to provide jobs for ANYONE these days. Where does Sen Mitch McConnell come up with the statement that "These are the people where the jobs are going to come from." Is he nuts??

[joanmcq]

Joan, we don't always agree, but your entire post was on target 100%.

Why would ANYONE want to start a business now and deal with benefits? I can't tell you how many people would quit their jobs and start a business or a consulting firm. But they have to stay on as an employee because that's the only way they can keep insurance.

Especially employees over 50. They're old enough to be independent in thought because they don't believe corporate BS anymore, and they make bad demographics for health insurance too, so many employers target people over 50 and devise retirement buyouts that aren't really voluntary. Insurance companies encourage employers to retain employees under 50, although you'll never hear any of them admit it.

A taxpayer smart enough to be making $250K per year will also be smart enough not to provide jobs for ANYONE these days. Where does Sen Mitch McConnell come up with the statement that "These are the people where the jobs are going to come from." Is he nuts??

Yeah, I'm 50, got divorced a few years ago, have my side biz. I wonder if we may start to see convenience marriages for health care like we used to see for immigration....

[taxea]

I am sure that the most current information will be provided by the IRS newsletter, email, etc if and when any changes or final decisions are made. Until then, I am a bit tired of all the commentary and speculation so I am waiting for the "horses-mouth" to speak.

[OtisMozzetti]

What differences does the tax rate make on that, really? If we tax them 20% instead of 15% they're going to take their money and start buying mattresses to stick it in instead of investing it? I've never understood the argument. If you can invest money and make income off it, why wouldn't you? Unless we're talking about > 100% tax rates, in which case, yeah, obviously the mattress is a good idea.

So, you apparently are saying that folks will risk investing almost as much time and money into job-creating businesses if those folks get to keep 80% of the resulting profits than if they get to keep 75% of the resulting profits. I'd say that if folks get to keep oh maybe 50% of the returns, then there's still a considerable incentive to put time and money into businesses which are believed likely to earn profits.

[BHoffman]

Multi-millionaires and billionaires are not investing in new companies that will hire American workers. Too much risk, not enough gain.

Multi-millionaires and billionaires continue to invest in elected officials because that is where the real money comes from. They just all enjoyed mind-boggling privatized gains and subsidized losses. A public declaration of willingness to pay 3% more in taxes isn't exactly impressive.

The very liberal Joseph Stiglitz, Nobel Prize winning economist, wrote an interesting column:

http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html?pagewanted=1&_r=1

Strictly business and completely nonpartisan. And it worked.

Mr. Bernanke's plan to devalue the US dollar will work much the same way - their gain, our pain:

This video is not only fun to watch, but is very informative in explaining one view Quantitive Easing for anyone who is interested:

http://www.youtube.com/watch?v=PTUY16CkS-k&feature=related

(there is some mild cussing - the "s" word is said a few times)

[David1980]

So, you apparently are saying that folks will risk investing almost as much time and money into job-creating businesses if those folks get to keep 80% of the resulting profits than if they get to keep 75% of the resulting profits. I'd say that if folks get to keep oh maybe 50% of the returns, then there's still a considerable incentive to put time and money into businesses which are believed likely to earn profits.

Not exactly. I'm saying simply looking at a tax rate as a means of determining how much money is invested into jobs is a pointless exercise if you don't consider what the alternative options for that money are. Rich people don't pull money out of nowhere, that money exists. They have to choose what they want to do with it. It's easy to say "If you increase the tax rate to 20% on LTCG they won't invest as much money." But the real question is "If they don't invest it, what will they do with it?" Other than letting it sit inside a mattress at 0% interest it's rather difficult to do anything with it that doesn't create jobs.

Should they be taxed at 50%? Well, obviously that would be a higher tax rate than other income. Is it fair to have different kinds of income taxed at different rates? If you like lower tax rates on investment income, the answer is probably "Yes!" After all, Wesley the Worker pays higher tax rates than Tommy the Trust Fund baby. Just because one has earned income and the other has investment income. (Personally, I don't believe we should have different tax rates based on the type of income.)

So there's two questions in play there. The first, does it actually do what people claim it does? Does taxing investment income at lower tax rates than earned income somehow increase the amount of money out there that is being invested? And if so, where did that extra money come from? The second question is of tax fairness. The second question isn't an easy one to answer because different people have different ideas of what fair is. Some like a national sales tax. Some a flat tax. Some like tax rates that increase as income increases. Some like tax rates that are lower on high income individuals. I'm sure everyone has a reason why their system makes sense from a fairness perspective - it's more of a question of philosophy of what "fair" is, so will vary person to person.