November 05, 2010
Agenda for the 112th: Sunsetting Tax Provisions
Posted by Leandra Lederman

Dave Hoffman’s initial post in this Masters Forum on when nothing is good enough got me thinking about the effects of doing nothing in the area of law I’m most familiar with, federal taxation. As is well known, an odd thing about our current Internal Revenue Code is that, if Congress takes no action, the tax law will change in some major ways on January 1, 2011. To hit some highlights, absent Congressional action, the following provisions are among those that will change:

– Income tax rates: The 10% bracket for individuals will be eliminated, so the first bracket will be 15%. The other brackets will all increase, with the top bracket increasing from 35% to 39.6%.

– Capital gains rates: The maximum capital gains rate for individuals will increase from 15% to 20% and the capital gains rate for individuals with a top marginal rate of 15% will increase from 0% to 10%.

– Dividends: Individuals’ dividends will return to being taxed at the same progressive rates applicable to other forms of ordinary income, rather than at a maximum rate of 15%.

– Estate tax: In 2009, the maximum estate tax rate was 45%, and decedents received an estate tax exemption of $3.5 million. Currently, those, like George Steinbrenner, who die in 2010, face no estate tax. However, unless Congress changes the law, 2011 decedents will return to the law prior to the Economic Growth and Tax Reconciliation Act of 2001, meaning a $1 million exemption and a top rate of 55%, with a 5% surtax applying to estates between $10 million and $17.184 million.

Given the election results, extension of the sunsetting tax cuts is on the table, and repealing or decreasing the scope of the estate tax no doubt will be, too. If changes are made in 2011, gaps could be eliminated by making the legislation retroactive to January 1.

The CBO found that all four options it examined for extending the tax cuts would increase income and employment during the next two years, compared to letting the cuts expire. However, the CBO also found that, in the longer term, each of the four options would likely reduce income because of the increase in federal debt they would occasion. The CBO concluded that other temporary tax cuts (such as reducing employers’ payroll taxes) or increased government spending (such as aid to the unemployed) would get a bigger bang for the buck.

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