Our Epic Planning Failure On Taxes

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There are two key elements to a tax policy:

1) collect revenue amounts as planned (i.e. bring in the cash you need)
2) enable the desired behavior or minimize non-productive behaviors tied to this tax policy

The USA now likely has the most dysfunctional tax regimes on these lines collectively of any major state.

Our recent estate tax fiasco, where for the year 2010 there is NO estate tax (so the heirs of George Steinbrenner, for example, inherit his wealth without paying estate taxes), is an epic reminder of our governments’ inability to drive any sort of behavior in a productive manner. For decades lawyers and accountants have been assiduously planning various complex strategies to avoid the estate tax (any wonder why Buffet is giving away billions while he is alive?) and yet if you passed in 2010 you pay NO estate tax, but if you happen to die in 2011, you will go back to the exorbitant rate of 55%! What sort of behavior is the US government attempting to elicit from its citizens? It is impossible to tell. And when you read the experts NO ONE thought that the US would just let the tax go to zero in 2010; everyone agreed that some sort of “fix” was inevitable; so they were all wrong, because clearly it is zero.

Now the situation is going to impact everyone, not just those contemplating their own morality. This article in the WSJ titled “Delays to Tax Tables May Dent Paychecks” shows how our inability to plan is now impacting anyone who is running a business with a payroll.

Lack of congressional action on 2011 income taxes may force the Treasury Department to make unprecedented moves to prevent US workers from seeing large tax increases in their January paychecks. The issue: 2011 tax withholding tables. Treasure officials usually release the tables… by mid November because it takes payroll processors weeks to adjust their systems before January 1.

If you look at your pay stub and all the complex deductions done by your payroll processor you can see that there is a lot of work behind those calculations, which are also impacted by the withholding that individuals select based on their filing status.

What happens after January 1 is that the tax cuts enacted under the previous administration expire and rates go up across the board, as well as impacting the Alternative Minimum Tax, capital gains, as well as the dividends received deduction (minimizing the double taxation of dividends). Unless Congress acts this year, which seems unlikely since they are all up for election, all these tax items automatically occur, although they could certainly be changed by Congress before the end of 2011 and other rates or policies put in their place.

Our tax policy now is totally unhinged when it comes to incentives. Are stocks that pay dividends going to be pummeled when the tax rate on dividends goes back up? You don’t know. If you live in the East or California in a high tax state and aren’t paying an arm and a leg in AMT, you may very soon if the taxes aren’t amended. The capital gain tax is more complex because many people are already betting that this will not be re-upped and cashing in their gains that survived the recent downturn in many cases anyways.

Don’t forget that this inability to plan is at the local and state level, as well. The State of Illinois, facing a huge deficit, decided to do nothing since elections are coming and just rolled the entire problem along to those that are elected next.

Really, I am a pessimist and I never thought that our tax policy at the Federal and State level would become so muddled. From an incentive and planning process it is making the lives of those who do this type of work extremely difficult to execute, and impossible to explain rationally to those that aren’t experts in the field. We have absolutely reached a new nadir.

Cross posted at LITGM

6 thoughts on “Our Epic Planning Failure On Taxes”

  1. Even *within* the government…can you imaging working at the IRS and having to deal with the systems changes, expanation-writing, printing, etc, that is required by the things the congressional clowns do with basically no advance planning or notice?

  2. The cause of current cluster-fudge is that left is caught between the rock of their reliance on Keynesian economics to justify the “stimulus” and hard place of their need to extort as much money as possible to pay off their patronage networks.

    The one thing that Keynes said you must absolutely never do in an economic downturn was to raise taxes. Indeed, Keynes explicitly postulated that the government would use taxation to reduce economic activity when it got to high. Yet Democrats have spent the last two years licking their chops at the prospect of ending Bush’s tax cuts even though doing so makes no sense in terms of the economic theory they claim to be working from.

    However, the Democrats entire raison de taire is to take from the productive and give to the unproductive. There are few reasons for people to vote Democrat other than to get money for themselves or others. If the Democrats can’t ladle out the gravy they have no reason to exist and they know.

    So they are stalled. They can’t borrow more, they can’t logically raise taxes but they can’t cut them either.

    More generally, you are correct that this represents the kind of error that government is inherently prone to regardless of the ideology of the people in charge. Government operates not on well proven empirical knowledge like engineering but on simply horse trading between competing self-interest. Tax rates are set at any particular rate not because of some proven economic model but because of an accumulation of random events, e.g. scandals, 9/11, hear attacks etc empower one political block over another.

    Government decision-making sucks. That why we shouldn’t use it casually.

  4. Zero estate taxes is fine. The point is that estate taxes are scheduled to go back up to 55% next year. What sort of behavior is the government trying to promote? That it is better to die in 2010 than 2011?

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