Our temporary tax code

If there is one thing that is killing the economic recovery, it is the uncertainty of what is going to come from government. Businesses are sitting on upwards of $2T that could be used to invest in jobs and expansion. They’re not investing because they don’t know what bullshit tax and regulatory policy is coming next that could have a negative impact on their bottom line. According to this article (from the WSJ), a huge part of that uncertainty is caused by our temporary tax code.

Welcome to the world of the temporary tax code.

In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.

Today there are 141.

Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions—an extension of Bush-era rates, a new estate-tax formula—but for only two years. A payroll-tax cut in the bill is for a single year.

This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.

The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.

This uncertainty hits hardest in the worst of all places – small businesses, which generate the bulk of employment.

Small business is often looked to as a source of job growth. But the latest monthly survey by the National Federation of Independent Business, a small-business advocacy group, found that 75% of owners felt it wasn’t a good time to expand, and one in five said the main reason was doubt about policy environment, including taxes.

For smaller companies, tax uncertainty could be an incentive to expand overseas rather than in the U.S., according to Tom Duesterberg, president of the Manufacturers Alliance, a group representing medium-size firms. Companies “can’t wait until all these [tax] questions are resolved,” he says. “They are not going to wait until all that definitively happens. They have to deploy cash, please their shareholders and expand and grow.”

Probably the biggest impact has been with the Estate Tax (Death Tax). There was no Estate Tax in 2010 but that will very likely change as congress ponders several options.

Perhaps nowhere has tax uncertainty been felt more intensely this year than in the estate tax, always a controversial matter.

A 2001 law lowered its rate and increased the exemption in steps, with the tax lapsing in 2010 and then, unless Congress acts, returning in 2011 at a 55% top rate on estates of $1 million or more. The unusual hiatus coupled with a far more costly tax as soon as 2010 ended gave “just an unbelievable Alice-in-Wonderland aspect” to planning for certain well-to-do families, says Bruce Stone, a Miami-area estate lawyer.

Sales of a life-insurance policy commonly used for estate planning rose 22% in the first nine months from a year earlier, and their death-benefit coverage was up 30%. Though the policies can also be used for other purposes, part of the jump seemed clearly to be for hedging against the possible estate-tax jump in 2011.

In a few cases, the uncertainty drove people to ponder extreme measures to avoid a tax hit for heirs.

David Drouhard, a Washington-state farmer who is 56, received a diagnosis of advanced kidney cancer 14 months ago and faced a grim set of treatment choices. Most offered little chance of extending his life more than 18 months, although an immunity-boosting drug held out some hope. Mr. Drouhard says he worried that inaction on the estate tax would force his family to sell his wheat and alfalfa farm, now worth about $3 million, to pay taxes if he died in 2011.

After much deliberation, Mr. Drouhard decided to take the immunity-boosting drug, but with a caveat: “I said, ‘If we don’t see results from the first series [of treatments], I’m going to stop,”‘ he says. “I try to take care of my family, so why not go ahead and die instead of living another six months.” He has responded well to the treatment, but adds: “I think it’s wrong that you have to make that kind of decision.”

The compromise Congress is weighing this week would set a top estate-tax rate at 35% and the exemption at $5 million.

But this would be for just two years. Just as this year, a failure by Congress to act then would cause the tax to then revert to a top 55% rate and $1 million exemption, in this case in 2013.

Revamping the tax code should be job one for the coming congress and the regime. We’ll see if they’re really serious about economic recovery or just paying lip service to it. We should hold their feet to the fire.

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