When the Bush administration tax cuts were extended through 2012, the idea was that the presidential election would illuminate the path forward on tax reform.
Although it's early in the process – and the GOP standard-bearer is far from certain – it's safe to say that we're off to a disappointing start when it comes to tax clarity. And the few issues that have come into focus should worry financial advisers.
Indeed, in his State of the Union address last week, President Barack Obama played the wealth card again.
“Washington should stop subsidizing millionaires,” Mr. Obama said. “In fact, if you're earning a million dollars a year, you shouldn't get special tax subsidies or deductions.”
The White House “Blueprint for an America Built to Last” was more explicit. “There is no reason that those making over $1 million per year should get any tax subsidies for housing, health care, retirement and child care,” the document states.
Such special tax breaks are known as “tax expenditures” because they effectively reduce government tax revenue.
The congressional Joint Committee on Taxation released its annual calculation of the tax expenditure costs earlier this month. Among the expenditures that carry the biggest price tags are those tied to products that investment advisers recommend to clients. One example: tax breaks for the buildup of investment income in life insurance contacts and annuities. That tax expenditure will short the U.S. Treasury by nearly $150 billion between 2011 and 2015.
Likewise, favorable tax treatment for contributions to 401(k)s and IRAs will cost Uncle Sam nearly $470 billion.
Such figures could be an alluring target for lawmakers who want to pay for lowering tax rates by eliminating tax expenditures. That notion was at the heart of the deficit-reduction recommendation from the presidential deficit commission in 2010.
Meanwhile, leading Republican presidential contender and former Massachusetts Gov. Mitt Romney vows as the fifth priority in his 59-point economic plan to “pursue a conservative overhaul of the tax system over the long term that includes lower, flatter rates on a broader base.”
So far, however, Mr. Romney has said little on the campaign trail to flesh out what broad tax reforms he would implement. In his economic manifesto, he mentions eliminating taxes on capital gains and dividends for investors with incomes below $200,000; ending the inheritance tax and reducing the corporate tax rate from 35% to 25%. He also would maintain the Bush tax cuts on personal and capital gains rates.
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But those ideas don't provide guidance for Congress when it comes to rejiggering the tax code. Mr. Romney has spent far more time on the hustings responding to attacks on his tenure as an executive at private-equity leader Bain Capital LLC — and extolling the virtues of capitalism — than he has on sketching out tax-reform details.
If Mr. Romney cruises to a big victory in the Florida Republican primary today, he may achieve some breathing room in the GOP nomination race. There will not be another big voting day until Super Tuesday in early March and he may have an opportunity over the course of February to address large campaign themes such as tax reform.
But don't hold your breath. It's likely that Congress — and investors — will have to muddle through this year without clear direction on tax policy from the presidential candidates.
