Saturday, January 05, 2013

The Tax Deal

Let's face it.  The deal that ended the "fiscal cliff" stand-off was not a budget deal or an economic deal.  It was simply a tax deal.  It did nothing about: needed structural change in the economy; a clarification as to what are entitlements as opposed to earned benefits; what to do about reining in health care costs; infrastructure investment that creates jobs and rebuilds the U.S. for a competitive future; making significant cuts in bloated government departments; retooling defense spending and sourcing such that it is independent of politicians totally focused on their districts share rather than what the country needs; Could this list go on and on; Yes.

The tax deal was somewhat of a breakthrough, although almost everyone can find something to dislike about it.  Here are thoughts from this perspective that are significantly influenced by the tax rates in our home state and the cost of living in our home state.

---Moving the top tax rate to those with $400/$450 thousand in taxable income as opposed to Obama's desired $250/$300 thousand was a welcome move even though that has become less of a personal issue.  As often noted here, as long as the IRS refuses to use all of the technology at its disposal to recognize cost of living differences, this higher level was only fair.  $250 thousand in metro New York for a family with children is far from wealthy even if in other areas of the country it would be high cotton.

---While the focus has been on the impact of higher rates on those above that $400/$450 threshold, the high end of the upper middle class got walloped by this tax deal:  First, while not paying the highest rates, those in the $250 thousand to $450 thousand range of taxable income are the most impacted by the still alive Alternative Minimum Tax, which was altered permanently to spare those with much lower incomes.  Those in higher tax states or those with large families in this range will still pay up big time for AMT, which only minimally impacts or does not impact those with much higher incomes, the true really wealthy;  Second, those with incomes above the $250/$300 thousand level get to pay an additional Obamacare 3.9% on capital gains and dividends and an Obamacare payroll tax surcharge of 0.9%(It appears that only those above the $400/$450 level also pay 20%, up from 15%, plus these additions but it's not completely clear here where the 20% base starts);  Third, households with $250/$300 thousand in income will see limitations on how much in deductions can be charged off, meaning the value of Schedule A will be diminished by each extra dollar earned above $300 thousand.

---The estate tax exemption in the bill of $5 million as opposed to Obama's proposed $3.5 million was a welcome concession.  The rate of tax on the amount above that was raised  to 40%, less than Obama wanted.  Again, we get back to the perspective from which one views this.  Everywhere in this country many small business owners would like to pass, as a legacy, the businesses that they have created to their children.  In metro New York, the land that a business sits on could easily be a large number, close to the $5million.  The higher $5 million exemption at least allows a little more leeway, on the margin, for those who inherit assets and may be less likely to need to liquidate or sell the family business to pay taxes.  At the end of the day, one could easily say that the $5 million exemption is far too low, given that for people at that level it is likely that all of the assets earned were fairly taxed over the years, and then to give 40% of that money back to the government in the name of income redistribution is simply unfair.  Nothing the IRS does is inflation adjusted(see AMT for the most egregious example).  Really wealthy folks will use expensive and complex strategies designed by law firms and private bankers to protect their estates in a major way, but for those with more than $5 million earned by their labor, that approach is neither easy nor likely as a possibility, too much up front cost(while $5 million is a lot of money, it should be noted that in most of Manhattan and in all of the suburbs with good school systems, a family that over time has paid off their mortgage and owns their house or apartment is probably 20% to 30% or more on their way to $5 million of net worth, then add in the value of a 401k after 30 years or more of working and that could easily be more than half of the way to eating up the exemption).

---The payroll tax addition of 2% is seen as a tax hike by much of the media, but it is of course going back to the long standing Social Security tax rate of 6.2% for employees, that was reduced by 2% for two years during the wrenching recession.  Whether this incredibly regressive tax is appropriate or should be revamped in some way is another issue.

---There is one tax that has been mentioned but without explanation that has been seen here.  That is the new "medical device tax", 2.3% in 2013 when previously there was no such tax.  Clueless about this one here for the moment.

Not being an accountant, this summary of opinons here is just that, opinions.  They are subject to change.


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