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Hard for me to figure out our taxin

As I See It

Much to my surprise, President Bush and his Republican colleagues have punched another tax reduction package through Congress. Hard for me to figure how we’re going to keep lowering taxes and tote the load for the war and rebuilding of Iraq and our commitments in Afghanistan; nonetheless, the tax bill passed.

The bill includes some provisions for lowering personal taxes that really have needed attention for years and years. The “marriage penalty” has finally been abolished. Before passage of this legislation, a couple could save income taxes by shacking-up rather than marrying. The tax on their combined incomes at the single, unmarried rates was significantly less than the same combined incomes taxed at the married, filing jointly rates. This was a black mark on American tax policy and adjusting the rates and exemptions to equalize the tax for marrieds and singles has eliminated it.

We are still in the ditch with the estate tax. As a result of Bush tax cut No. 1, the estate (death tax) rates are dropping steadily over the next few years. Currently, estates valued at $1 million or less are tax-free. Next year, the exemption moves to $1.5 million and continues upward until 2010 when the tax is entirely eliminated. Bright on the morning of Jan. 1, 2011, however, the death tax goes back to where it was when the legislation was passed. Huh?

That’s right. After a steady progression downward to zero, the death tax will go back to where it was. Why? The answer, though probably of little consolation, is simple. By putting a “sunset” provision on the tax, the projected tax revenue loss to the government was much less than it would have been if the changes were permanent. You might call it “smoke and mirrors tax policy.”

All this seems great, and it is for folks dying before 2011. However, even though most people are highly motivated to save taxes, few are willing to arrange their own deaths to minimize taxes. Desire to pass on big bucks to little Johnny has its limits.

Of course the Republicans expect to pass additional legislation eliminating the death tax permanently before the end of the decade. Whether this comes to pass or not will depend on whether the Republicans retain control of the federal government, the economy, the mood of the country and other issues. The uncertainty over the future of the estate tax this decade makes me glad I’m no longer practicing tax consulting.

Another temporary tax reduction is in place for dividends. As I understand the deal, for a limited time, dividends will be subject to a lower tax rate than salary, etc. Capital gains taxes have also been reduced for a limited time. The rates change regularly over the next few years and go back to where they were in 2008 unless Congress acts to extend, or make permanent, the lower rates. I’m getting dizzy trying to keep this stuff straight.

Part of the thrust to grant lower tax rates on dividends was to discourage CEOs from pilfering corporate funds. Here’s the theory. Since capital gains taxes on the sale of stock were taxed at much lower rates than other types of income it made sense to retain profits in the business rather than paying them out as dividends. Thus, the theory holds, the stock price would go up and up due to the increasing wealth of the company resulting from not paying dividends and the stockholders could sell their stock and be taxed less than they would have been if the dividends had been paid.

The problem arose because all these companies were accumulating all this money for which they had no real use and the CEOs succumbed to temptation and used it for their own enjoyment. As an idle mind is the devil’s workshop, so were idle funds the CEO’s undoing. Cutting taxes seemed the best way to curtail these CEO’s opportunities to splurge. Nice theory. Whether there’s any basis in reality or not, only time will tell.

Well, I couldn’t present a complete analysis of the new tax law in 900 words, but this is a snapshot of some of the more pertinent provisions. And, some of the zaniest.

A half-century or more ago the federal government decided to expand the role of taxation to include social policy in addition to collecting money to run the government. That began the downhill slide, which continues today. It seems to me that we’ve lost sight of the primary purpose of taxation — to raise sufficient money to run the government. The goal now appears to be manipulation of society by offering tax benefits for doing, or not doing, certain things. Additionally, there’s a fa


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About Joe D. Jones

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