Two tax reform issues are likely to collide over the coming months, and the fallout could be painful for high-income taxpayers.
Two tax reform issues are likely to collide over the coming months, and the fallout could be painful for high-income taxpayers. More pain is likely next year if a Democratic president is elected in November, because both candidates have promised higher taxes for wealthy Americans.
These events are likely to complicate the lives of financial planners and their clients. Any client couple earning more than $200,000 a year could see a substantially greater income tax burden.
Congress and the candidates have targeted them as sources of substantial additional revenue.
The first tax reform issue is that of the corporate income tax, which is being pushed by Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee.
As reported in InvestmentNews last week, policymakers and corporate executives debated corporate-income-tax reform in Washington late last month, and even the business community was divided on the issue.
Mr. Rangel has proposed reducing the top corporate rate to 30.5%, from 39%, while broadening it by eliminating various business tax breaks. But the proposal, to offset the cost of reducing the corporate income tax, also would raise taxes on couples earning more than $200,000 a year.
This is designed to cut the corporate-tax burden, nominally one of the highest in the industrialized world, to a more competitive level.
Congress this year also is expected to wrestle with a permanent repeal of the alternative minimum tax, which otherwise could affect more than 25 million U.S. taxpayers when they pay their 2008 income taxes.
And that may not be the end of the pain for these taxpayers. Both Democratic candidates for president say that they would allow President Bush's tax cuts of 2001-03 to expire in 2010, and they would use the additional raised revenue to reduce the deficit and help pay for expanded health care coverage.
Congressional Democrats also have vowed to allow his tax cuts to expire in 2010, meaning that the election of a Democratic president and a Democrat-dominated Congress would guarantee the expiration of the tax cuts.
As a result, high-income taxpayers can expect a substantial jump in the top tax rate in 2011, back to 39.6%, from 35%, even without increases designed to offset the repeal of the AMT and the costs of any business income tax cut.
In addition, the lower dividend and capital gains tax rates also are expected to be revised upward, even if they aren't allowed to return to their previous levels. That may call for changes in investment strategies.
It is a pity that these tax reform agendas are colliding without a top-to-bottom analysis of the efficiency and long-term economic effects of the various taxes. It would be far better for the country to pass more temporary fixes until Congress holds wide-ranging hearings on the fairest, most efficient and least economically damaging ways to raise the revenue that the federal government needs.
