Commentary 12/31/2010
Tax Legislation at Last! Recent legislation passed by Congress and signed by President Obama extends the Bush-era tax cuts for all income levels, keeps tax rates on long-term capital gains and qualifying dividends the same, reduces employee payroll taxes by 2% for 2011, reinstates the estate tax with a $5 million exemption per person ($10 million for couples) and top tax rate of 35% and allows businesses to depreciate 100% of equipment through December 31, 2011. It extends as well other expiring benefits for individuals and businesses. The social security trust fund is also made whole by transfers from the general fund.
It was in everyone’s interest to reach agreement on tax legislation and not jeopardize the economic recovery by increasing income taxes. Keeping the lower income tax rates and reducing payroll taxes certainly benefit all working Americans. Along with the extension of benefits for the long-term unemployed, these provisions will put more money in the pockets of middle-income people whose spending will probably help the economy. Ideally too, wealthier Americans will also reinvest their savings and contribute to reinvigorating the economy.
The legislation addresses income and estate taxes and a host of deductions and credits, including the exemption for the alternative minimum tax, for two years. After 2012, the provisions of the recent legislation expires, and the uncertainly that has hindered planning for businesses and individuals returns once again. Indeed, one can argue the recently passed legislation creates more uncertainty and complexity because predicting what Congress will do over the next few years is virtually impossible. Tax planning, as well as financial and investment planning, may become even more challenging.
Moreover, while Congress has temporarily addressed income and estate taxes, it has ignored the burgeoning national deficit. It is no secret that the Bush-era tax cuts, along with the wars in Iraq and Afghanistan, are largely responsible for the deficit. The recently passed tax law comes with a price tag of about $858 billion over ten years. In 2011, Congress will face some tough choices about entitlement and other spending and taxation. There is some talk of overhauling the tax code. However, the issue is complex, and Congress has clamored about tax reform in the past without doing anything.
No matter where one stands politically, it is clear that there is a stark tradeoff between cutting income taxes and reducing the deficit. Few disagree that spending cuts alone cannot bring the deficit down. A growing economy will surely increase tax revenues and give a needed shot in the arm to the slowly recovering economy.
One can hope that the bipartisan cooperation on the tax bill will carry over to the new Congress and that together our representatives can achieve meaningful tax reform and agree on a plan to bring down the deficit significantly.