Tax Cut Confusion

One to the many nice things about blogging is it tends to provoke me to look at what’s being discussed in print and on line, using that to shape the topic for the week.   Usually there’s something that emerges as worth more attention than I’ve given it – and that brings motivation to learn and then to share.  That said – I am burnt out on this tax the rich / jobs bill stuff.   I must admit part of my problem is that this is a complex issue.  So, in an effort to overcome my nascent attention deficit disorder and to better understand what is actually a consequential topic to my pocketbook, I am considering the following question.    Do tax cuts really help the economy? 

The Tax Foundation says not unless there’s a sense of permanence associated with the cut.  We all know that nothing is certain but death and taxes.  However the new twist on that is “what taxes and when” tends to be an open question.  The Tax Foundation article suggests the temporary nature of  the proposed payroll tax cuts is a problem.  The argument is, in an uncertain economy when it’s a one-time deal, tax cuts don’t stimulate the economy.  People are on a budget, and don’t expect things to get better, so rather than spend the “windfall” they put the money in an emergency fund.   

The question of whether tax policy is effective if it’s not permanent is a popular topic.  The blog A Taxing Matter takes issue with the pressure to make the R&D credit permanent arguing that companies that need to do research anyway shouldn’t get a special deduction for doing it.  The New York Times did a scathing piece on this topic earlier this month, targeting the video game industry.   In both these articles they argue the specific tax cut is bad, but ineffective when temporary.   The same Tax Foundation piece I referenced earlier uses that logic for saying a temporary tax cut to encourage jobs is useless.  When people with such different views come to essentially the same conclusion, it’s usually a sign they’re on to something.

The only missing piece I see in this discussion is that these temporary tax cuts aren’t being imposed from outer space.  We (since I vote I have to include myself in this group) keep electing people who see temporary tax cuts as a way to get re-elected.   As a mom I think we voters have to admit that the child- like behavior in Washington didn’t occur without our participation, and won’t stop unless we take appropriate action.

Speaking of being appropriate – I should mention that Christina Romer, whose work I cited last week as an argument against the tax hike portions of the jobs bill, has a piece in the New York Times Business Section today defending the bill.  (Though notably she doesn’t say good things about the tax hikes.)  Here’s the link if you’d like to know more.     

Tax Simplification

As a mom, my view of Mother’s day is thinking about the future, and what it holds for my son.  He’s a strong student, so I’m optimistic he’ll be in a position to appreciate the benefits of tax planning when he’s older.  Of course, what kind of planning one will be doing 20 or so years from now is a big question.    

Some interesting thoughts about tax overhaul include the risk to “S” corporations from corporate tax reform.  Ernst & Young  sponsored a study looking at some scenarios around this issue. According to the E&Y article, it’s important to consider “S” corps because they represent more than half of all business activity.  If the plan is to reduce corporate tax rates and then make up the difference through individual taxation, the E & Y scenario gurus believe the tax bill of your average “S” officer / shareholder would increase on average, by 8 percent or $27 billion annually from 2010 through 2014.  Not sure how they got this nugget, but in their alternate tax reality the biggest changes in tax payments (as in paying more) would be to agriculture and mining, followed by construction and retail trade, and then manufacturing, finance and insurance.

While the piece I read was sketchy on the details, it’s worth thinking about.  As we’ve seen from the current recession, what’s best for the big companies isn’t necessarily best for the economy as a whole.  Small business remains the icon for what can bring back prosperity.  That will certainly mean S corps matter.

An Investment newsletter for financial planners  highlighted by the AICPA had similarly dire ideas around some proposed simplification tax reforms.  They predict nothing bad until 2013, but in particular anticipate capital gains related tax breaks are the most at risk.  Another area where the planners see issues is sheltering retirement income, if you’ve got plenty of it.  That doesn’t sound so off base, as with the aging of the baby boom, most of the savings in this country will be related to retirement. 

While simplifying the tax code is offered as an easier fix than cutting the budget, it’s discussions about the implications that make me think that’s going to be the hardest fix of all.