Actually, the Warren Zevon song refers to “Lawyers, Guns and Money,” but the Internal Revenue Code can also be a dangerous weapon. Now that the campaign for president has reached the general election stage, it’s time to realize that whoever wins the election; there are massive changes in our federal tax system looming ahead. These changes will affect us and our clients in various ways. In some cases, there will be little that can be done but to accept the changes; in other situations, there may be planning that can be used to reach a better result. Here are a couple of areas where change may occur:
- Federal estate tax: This discussion has been going on for several years, with much misinformation being spread about. (Read “Wealth and Our Commonwealth” by William H. Gates and Chuck Collins for a good review of this debate.) But there will be changes in our federal estate tax system in the future because leaders in both parties agree that the tax must be revised to include only the truly wealthy, not those who bought a home in a good neighborhood. There might be relief for small businesses and farmers, but in general the tax should be one that allows people to pass on some of the fruits of their life’s work without destroying the incentive of the next generation to take part in life’s struggle.
- Federal income tax: The reductions in income tax rates that were enacted in 2001 are scheduled to phase out in a few years. One solution is to extend indefinitely, but this easy answer has to be balanced against the colossal budget deficits that have resulted, in part, from those tax reductions. The view that those budget deficits can go on forever and will somehow be resolved or will disappear as a result of future growth is now classified with bedtime stories.
- Alternative minimum tax: Whose idea was this anyway? In the past few years, we’ve had small bandages applied to this gaping wound in our tax system. Some have suggested just repealing it, which would only result in even larger budget deficits. But reducing its effect to those who are perceived as not paying a fair share of taxes, which was the original intent of the law, will require that some difficult choices be made. Doing nothing (which is a skill of both political parties): not an option.
- Social Security taxes: Someone will have to finally accept that this problem also can’t be ignored or magically wished away with private accounts, and that higher taxes will only be acceptable to a limited degree. As last week’s blog indicated, you can either increase revenues or reduce benefits; there’s no third way.
All of these problems will have to be addressed by our next president, either John or Barack. In the course of resolving them, many provisions of our tax laws will be placed on the table: taxation of life insurance, employee benefit taxation, relief for older taxpayers and those with children. Many constituencies will be contending for their interests. It’s important for all of us to know what’s happening, and to plan for change, for us and for our clients.
Robert H. Louis