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Imperative That Congress Address Expiring Tax Provisions

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By Lowell L. Kalapa
(Released on 11/14/10)

With the shift in control of Congress, lame duck lawmakers may not be as willing to act on the renewal of the Bush tax cuts, allowing them to expire as scheduled at the end of this year.

That action would do taxpayers a great disservice, as taxpayers would begin the new year with the pre-Bush tax rates and treatment of income. In particular would be those who have done estate planning based on the extension of the federal estate tax provisions effective for the current year. Should the estate tax treatment revert to the prior provisions, the current estate exclusion and estate tax rates would be devastating especially here in Hawaii where real estate values put the average home way above the previous estate tax exclusion.

Another provision that may have a devastating impact on the nation’s economic outlook is the reduced tax rates on capital gains and dividend income. The substantially lower rates on this type of income have been a saving grace for companies to attract the capital they need to expand and create the jobs that the nation’s unemployed sorely need at this time. Those retirees who socked their retirement savings away in the stock market will feel the pinch of the federal tax should the preferential rate for dividend income sunset as is currently scheduled.

Although the lame duck members of Congress might want to foist the problem on the next Congress that will convene in January, current members need to address both sides of the ledger should they decide to extend the Bush tax cuts. On the other hand, the President may see this lame duck session of Congress as his only opportunity to push through his version of retaining the tax cuts only for the “middle-class.” If that is the case, then federal lawmakers need to address the spending side of the ledger as well as the uncontrolled spending of the last two years that will return to haunt the next session of Congress.

Trillion dollar deficits will not sit well with taxpayers/voters and indeed may have been one of the reasons voters voted as they did in the midterm elections. Even the federal reserve is concerned that the burgeoning federal deficit is having a drag on economic growth and activity and recently announced that they would be buying $600 billion in treasury notes over the next six or seven months in an effort to lower long-term interest rates. Thus, not only would the lame duck session have the problem of what to do with the expiration of the Bush tax cuts, but lawmakers will need to address the huge deficit they have run up over the past decade.

It is increasingly apparent that the federal government cannot spend its way out of the current economic downturn and that the stimulus program has not delivered on the promises made. Therefore, it appears that there is really only one thing that Congress can and should do and that is get out of the way of the private sector by encouraging investors to return to the marketplace to create the jobs needed by workers that, in turn, will put resources back into the hands of consumers and create the demand for goods and services.

Can it be that simple? When one realizes how much government – at all levels – has intruded into our lives, it is not hard to understand how government has created a drag on the economy, making it more and more costly to do business and make ends meet for the average family. Over taxed and over regulated economies cannot prosper, making them unattractive for investors as they know they cannot make a profit in such an environment.

During this past campaign season much was made about tax laws that sent jobs overseas. Truth be known, it is not only tax laws but also labor laws, exacerbating regulations and frustrating delays in the permitting process. Not that government oversight is not important, but it appears that bureaucracy at all levels of government has lost the art of using common sense. Instead, the system has been designed so no one has to take responsibility and when no one takes responsibility, no one is willing to make a decision. And why doesn’t anyone want to make a decision . . . well, if it is the wrong decision, no one wants to take the blame for making the wrong decision.

So in the next few weeks watch the lame-duck Congress squirm and sweat, because the decisions that must be made won’t be easy. Will Congress extend the Bush tax cuts, or will they extend it for the “middle-class” and if they extend any of the tax cuts, how will they pay for them? Will Congress continue spending without a care in the world and in the name of reviving the economy? Or will they wake up and realize we are in a sea of red ink?

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

 

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