As the results of the 2010 election are assessed, wealth managers are looking ahead to what the lame-duck Congress may do before year-end to settle several tax issues that are up in the air. Tax cuts enacted by President George W. Bush contain sunset provisions that are scheduled to take effect on Jan.1, 2011, which would raise the tax rates on wages, capital gains, dividends and estates—unless Congress acts before year-end to extend the lower rates .
“We believe coming out of the election, from the tax reform and legislation standpoint, [Senate Majority Leader] Harry Reid’s [D-Nev.] reelection is huge,” says Tim Speiss, partner and chairman, Personal Wealth Advisors, at EisnerAmper LLP. The same goes for “Nancy Pelosi stepping down as Speaker of the House,” and turning that over to “Rep. John Boehner, R-Ohio.”
The Senate will retain a Democratic majority while the House will have a Republican majority. In gubernatorial races around the country, Republicans picked up seats while Democrats lost governorships. The message, Speiss told AdvisorOne.com in an exclusive interview on Nov. 3, is “smaller federal government, less spending…and more state control.” In terms of federal spending, “it’s not just the deficit, it’s the balance sheet.” Speiss adds.
Personal Income Tax
To keep it in perspective, if Congress does not act, and, “if Clinton tax rates come back on Jan. 1, at 39.6% [for top earners], within the first 18-months there would be $300 billion in additional tax receipts” coming in, Speiss explains. He observes that this would eliminate “one-third of the deficit.”
But, asks Speiss: “Would you really want to be raising taxes right now in the current [economic] environment?”
President Barack Obama has proposed keeping the Bush tax cuts for personal income temporarily in place for families making less than $250,000. See “Gauging the Impact of Obama’s Proposed Tax Plan, Part II.”
It isn’t about more taxes coming in, Speiss notes; it is looking “more and more like [there will be] extension of the current rates—and to pay for that, spending cuts.” He adds: “The administration might come out in favor of extending the current rates in an effort to show leadership and guidance.”