Tax Battle Heats Up

by: Wall Street Strategies

By David Silver

So the House Democrats had a little powwow yesterday, and it seems like they are gearing up for a fight. The maneuvering could backfire. If this nonbinding agreement to not bring the bill to vote is actually adhered to, taxes will increase dramatically on January 1. So it looks like there will either be a) a political hari-kari by some House Democrats and Americans will see their tax rates revert back to 1998 levels; or b) Democrats will swallow their "pride" and a tax increase will be averted.

A Harvard business professor said on Thursday morning on CNBC that the compromise was still weighted heavily towards the Democratic side. He equated the compromise to being 85% of the Democratic demands, where only 15% came from the Republicans (basically only the $250,000 threshold and dealings with the estate tax). I am nowhere near the top tax bracket, and I should be the target for all these tax cuts, but I didn't really see any benefit from all these actions. I know I am a small sample set, but aside from paying off my credit card bills every month, those monthly costs (rent and utilities), and paying my student loans, a small amount goes into savings, but the rest goes directly back into the economy. I think I can name five delivery guys in New York City that could afford something nice for their children off the tips I have given over the past year.

Let's take a look at the tax rates from 1998, 2008, and what next year's would look like. So those making $16,050 would see a 50% tax increase from 10% of their income to 15%. * - I have read conflicting accounts of what will happen to the standard deduction and personal exemption. I have left it unchanged for the time being.

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Here is a list of the items that will be temporarily extended:

� 10% tax rate increase
� 25%, 28%, 33% and 35% tax rate increases
� Repeal of personal exemption phase out
� Repel itemized deduction limitations
� Capital gains and dividend rates
� Modified child tax credit
� Marriage penalty relief
� Expanded Dependent Care credit
� Adoption tax credit
� Various education incentives
o Coverdell Accounts
o Employer-provided educational assistance
o Expanded student loan deduction
o American Opportunity Tax Credit
� Two-year AMT patch
� Temporary estate, gift and generation skipping transfer tax relief
� Bonus depreciation
� Unemployed Insurance (another 13 months)
� Reduction in employee-paid payroll taxes
� Energy
o Biodiesel and renewable diesel
o Refined coal
o Energy efficient new homes credit
o Ethanol (extends per gallon tax credits as well as tariffs on imported ethanol)
o Energy efficient appliances
� Individual Tax Relief
o Certain expenses for elementary and secondary school teachers
o State and local general sales taxes
o Qualified tuition
� Business Tax Relief
o R&D Credit
o Indian Employment Credit (interesting it is called an Indian reservation in the bill, and not native American)

Nothing against those who own motorsports entertainment complexes, but do we really need to extend the seven year straight line cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes? I mean, I don't know how much money this costs but I feel like we could find a better use for it, no?

I really wonder what House Democrats are holding out for. Changes to the estate tax? Are they really that pissed off about taxes not going up for people that earn more than $250,000? There are so many things that need to be fixed in this country, let's try not to hinder the already slow rebound. I differ from Charles a little in that I do believe that those at the upper upper end of income ladder should get taxed a little more and help to give those below it on the success ladder a chance to achieve some of that success... Now, I do not think that $250,000 should be the line in the sand; let's make it $1,000,000 per year and make that marginal rate higher. I know that I would be only adding to bureaucracy, but add another bracket or two in there. It shouldn't be $300K and above.

Another potential option is the mortgage interest deduction. I am going to keep trying to find the amount this deduction was used in the past few years, but what benefit could come from altering the mortgage deduction? My potential idea would be to offer an accelerated amount in the first five years of owning the home, then over the next five see that benefit decline, until after 10 years, when there is no tax benefit. Of course, the time frame can change, and maybe it encourages flipping, but that is a problem that will obviously be worked out.

It seems that there is plenty of fat to trim off the tax code bones, but some people on both sides of the aisle seem to be shying away from rolling up their sleeves and actually getting something done.

Disclosure: None