TAX ADVICE from Julian Block

Julian Blockrenowned tax advisor and Larchmont neighbor, Julian Block, provides help for Gazette readers

 

Reduced Rates "Sunset"

Congress routinely passes temporary tax breaks intended to become permanent. The sole reason for the budgetary sleight of hand: to make tax bills appear less expensive than they actually are, thereby making the government’s books appear better than they actually are.

The proliferating number of temporary breaks that expire at varying times includes 2003’s income-tax rates of 10, 15, 25, 28, 33 and 35 percent. They “sunset” after 2010, meaning that they vanish from the Internal Revenue Code, and the rates revert in 2011 to 15, 28, 31, 36 and 39.6, as they were before 2001.

For the reductions to be allowed to expire after 2010 or scrapped before then, control of the White House and Congress probably would have to revert to the Democrats. As of now, Republicans are confident they will keep control; some openly admit their goal is to have a future Congress extend the reductions beyond 2010.

“Tax-cut sunsets are a lot like the actual sunset,” sardonically observes Robert Reischauer, now head of the Urban Institute, a research organization in Washington, and formerly director of the Congressional Budget Office. “When the sun sets in nature, you know it’s going to rise again. And when you sunset a piece of tax legislation, you do it knowing full well that the political process will bring it back to life.”

Commerce Secretary Don Evans pooh-poohs such criticisms. He is sure that the “American people will understand” why sunsets are necessary.

Contrast his soothing words with those of another commerce secretary, Peter G. Peterson, who served under Richard Nixon. What perturbs Peterson is that, ”So long as taxes are cut, even dissimulation is allowable. A new Republican fad is to propose that tax cuts be officially ‘sunsetted’ in 2 or 5 or 10 years in order to minimize the projected revenue loss – and then to go out and tell supporters that, of course, the sunset is not to be taken seriously and that rescinding such tax cuts is politically unlikely. Among themselves, in other words, the loudly whispered message is that a setting sun always rises.”

Whoever’s right, it is an article of faith with me that few taxpayers are aware of the issues raised by sunsetting, let alone whether the tax brackets ought to be further compressed, as accomplished by President Bush’s tax packages, or made more progressive, as was last done early in President Clinton’s first term, when a one-vote margin in a nominally Democratic-controlled House of Representatives (cast by a representative whose constituents ousted her in the next election) made it possible for him to move the top rate from 31 to 39.6 percent. And oh, if you are still with me, that 39.6 percent is where President Bush came in.

Whether for good or bad, all presidents are aware of surveys that repeatedly show “the country is suffering from a massive case of tax illiteracy that goes beyond the inherent complexity of the system and cuts across every economic and educational stratum.” The New York Times cited one survey’s results several days before the filing deadline in 1993. For openers, about 75 percent of us are unable to understand that when someone is in the 25-percent bracket, only the part of a person’s income that falls into that bracket gets taxed at a 25-percent rate. And nearly 80 percent “don’t know that a tax credit, rather than a tax exemption or deduction, can reduce taxes the most.”

But enough of my nattering about legislative vagaries and the dismayingly high percentage of Americans who are tax challenged. Time to turn on the set and watch a video of Tyrone Power and Ava Gardner in the film version of my favorite Hemingway novel, “The Sunset Also Rises.”

 


Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as “a leading tax professional” and by the Wall Street Journal as an “accomplished writer on taxes.” His “Year Round Tax Savings” covers key changes introduced by the 2003 tax act, shows how to save truly big money on taxes – legally – and explains the steps you should take to reduce taxes for this year and even gain a head start for future years.

Send $9.95 for an e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to: J. Block, 3 Washington Square, #1-G, Larchmont, NY 10538-2032. He can be contacted at julianblock@yahoo.com.

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