The great tax debate

By Allan Chernoff, CNN senior correspondent


NEW YORK (CNN) -- One of the certainties of life -- taxes -- suddenly is terribly uncertain, and not just for high-earners.

Tax cuts Congress enacted in 2001 and 2003 are scheduled to expire at the end of this year, which for some Americans would push up federal income tax rates. Also at stake are taxes on dividends and capital gains, as well as tax credits and deductions.

Most Democrats and Republicans agree the middle class should not have to face tax hikes. But what about high-earners, families with income above $250,000 and singles above $200,000? Therein lies the battle.

The Obama administration favors allowing the Bush tax cuts to expire for wealthier Americans. Treasury Secretary Timothy Geithner this week argued the Administration plan would raise billions for the government with minimal impact on the economy.

"The top 2% are the least likely to spend those tax cuts, certainly not in comparison to the 98% of Americans who make less than $250,000 per-year," said Geithner.

Republicans, though, are firmly opposed to the Administration plan. "We don't believe anybody should face a tax hike, particularly in a recession," said Don Stewart, press secretary for Republican Senate Minority Leader Mitch McConnell.

"It's clear they want to hold hostage tax cuts for the middle class for their desire for more tax cuts for the wealthy," countered Jim Manley, spokesman for Democratic Senate Leader Harry Reid.

Members of the Senate Finance Committee met for a planning session two weeks ago. The real work will begin when Congress returns from its summer break in mid-September, though the legislative session is slated to last only a few short weeks before another break in early October for campaigning.

As a basis for negotiations, Finance Committee Chairman Max Baucus, a Democrat, plans to use a bill he introduced last year that would permanently hold steady tax rates for lower- and middle-class Americans.

On the House side, the tax-writing Ways and Means Committee intends to tackle the issue after Senate Finance has finished debate.

Democrats anticipate needing 60 votes to overcome a possible filibuster from Republicans to push through a plan that would retain current tax rates for the middle class while allowing higher rates for wealthier Americans. That will be a challenge. Democratic Sens. Kent Conrad, Ben Nelson and Evan Bayh have said this is no time to be raising taxes, even on the small group of high-earners.

"I support extending the expiring tax cuts for at least a period of time because raising taxes in a weak economy could impair recovery," said Senator Nelson.

As the tax rate deadline ticks, professional tax planners are growing impatient.

"They're dysfunctional," complained Evan Snapper, financial advisor with Anchin Block & Anchin. "It's terrible. It's a political game that's hurting the country."

Usually accountants advise clients to defer income and investment gains until the following year -- why owe taxes now when you can put them off?

But the possibility of higher tax rates in 2011 calls that logic into question.

"It's tax planning turned on its head," said Doug Flynn, a certified financial planner at Flynn Zito Capital Management.

Because of the uncertainty, planners can't yet advise clients whether to sell real estate, stocks and bonds or to convert traditional Individual Retirement Accounts into Roth IRAs, which requires payment of taxes on investment gains.

"It's putting us almost in a standstill. We're trying to get our ammunition ready, but we're not certain what ammunition to load," said Steven Bandini, a certified public accountant at Zapken & Loeb.

And for entrepreneurs who have to worry about both business and personal income taxes, it's added an extra layer of uncertainty on top of the sluggish economy.

New York business owner Ellen Donath says she's won't even consider hiring additional staff, until the issue is resolved because she's unsure of whether more of her company's revenue will have to go for taxes.

"You don't have a clue of what you can do," said Donath, who runs Donath Communications, an advertising, marketing and design firm. "When you know what the rules of the game are, then you can play the game." To top of page

 
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