Wednesday, January 06, 2010

Reform (and Inaction) Behind Closed Doors

Drudge today contains a link to a video clip showing President Obama's frequent promises to televise health care reform talks on C-Span. Here is the direct link:

But of course, that is not a promise he will choose to keep. Despite representations by Speaker Pelosi that the process is open, President Obama is encouraging the Democratic leadership to bypass traditional conference processes and to pass this bill quickly. An AP story can be found here:

So, no transparency (on C span or otherwise), not to mention the promised bipartisanship from the President for this bill. It will be done behind closed doors as the Democratic leadership crams the result down the throats of the American people. It is like your evil stepmother forcing bitter medicine down your throat and enjoying it while you gag, all the while telling you "It is good for you." Right.

Meanwhile, as this spectacle unfolds, we should be reminded that there are genuine areas of concern where Congress has been expected to act for the benefit of the people, where it has failed in its job. Consider the matter of revisions to the estate tax. Due to the oddities of budget reconciliation compromises with democrats during the Bush administration, various aspects of tax reform enacted were temporary in nature, sunsetting in 2010. The estate tax was one such example, with the tax effectively abolished this year. However, it will reemerge with a vengeance in 2011 with an exempt amount of only $1 million (compared with $3.5 million in 2009) and a top marginal rate of 55 percent.

While it may sound like a good thing to have the estate tax expire, the devil is in the details. As a corresponding change, the income tax consequences of inherited property are substantially worse in many cases. In what I used to refer to as the "cheat the government and die" strategy, persons of modest means who were not subject to the estate tax would be able to avoid taxes on the appreciation in the assets they passed on to their heirs by the basis adjustment in I.R.C. § 1014, which essentially allowed the heir to take a basis equal to the fair market value of the property. Of course, this adjustment was also available to taxable estates as well. But with the decline of the estate tax, heirs with inherited assets may now face an income tax in connection with the sale or exchange of those assets, since the 1014 basis adjustment rule also sunsets in s in 2010. Its successor, section 1022, is complex and may provide some adjustments for those with modest assets, but it is likely to raise income taxes for many who inherit property.

Although the House has passed a bill to extend the 2009 laws, the Senate has not taken this up. House leaders also knew that this bill was "DOA" in the Senate, and that much more work needs to be done, certainly before the 2011 return of a $1 million exemption and high tax rates, which will dig deeply into the middle class and hit small business owners especially hard. There are rumblings of retroactive changes, which would reach back and impose taxes on events before the legislation is actually completed.

So, how does one plan in this environment of uncertainty? Bear in mind that many estate plans contain formulary clauses, which make gifts based on the amount of estate taxes. Those formulary approaches are jeopardized by the uncertain state of the law at the time of death.

Should citizens also be subject to the uncertainty of laws of taxation, as they are also subject to the uncertainties of secret negotiation of health care reforms? Citizens who value the rule of law, as well as open and accountable government processes, should be outraged on both counts.


1 comment:

MMS said...

Of tangential and smaller damage of congressional inaction on sunsetting tax laws in the effect on financial professionals. Perhaps Goldman Sachs clients easily see what is happening, but in less extravagant nieghborhoods the financial advisor is forced to have a silver tongue to explain what has happened, is happening and may happen. This detracts from the trust an advisor with integrity strives to build with clients.