Taxable Talk

It now appears certain that Barack Obama will become the next President of the United States. Congratulations to him. It’s an historic occasion when race really doesn’t matter in electing a president. That said, it’s now time to ponder what this will mean for you and I vis-a-vis taxes.

First, I wrote a piece on what taxes would be like if Barack Obama were elected president. You may also want to read my overview on the two candidates, and the likely impact of Congress on your taxes.

Obama has said he would bring people together. However, his actions are very, very liberal. We will have a Congress where both the House and Senate are controlled by the Democrats (though it appears that Republicans will have enough votes to filibuster in the Senate). In the past, when this has occurred taxes have gone up.

The only saving grace is a bad economy. In the past, Democrats usually try to spend their way out of bad economies. When I was in school we were taught that Franklin Roosevelt’s policies—the New Deal—helped end the Great Depression. Economists now believe that they actually extended the Great Depression by seven years.

Perhaps President-Elect Obama will live up to what he said during the third presidential debate:

…what I’ve done throughout this campaign is to propose a net spending cut…. What I want to emphasize … is that I have been a strong proponent of pay-as- you-go. Every dollar that I’ve proposed, I’ve proposed an additional cut so that it matches. (Hat Tip: Volokh Conspiracy)

I’m not hopeful of this happening. He may want to, but I expect that the Democratic Congressional leaders want to spend, spend, spend. I hope I’m wrong. If I am I’ll happily post that.

Democrats may state that they have received “a mandate.” When I last checked the vote is 51% to 48% which is hardly a mandate. Indeed, the country remains nearly divided in half. I’m not going to point out the random factors that could have changed this race (I’ll leave that to political pundits). But when you hear the mandate meme, throw it away.

I suggest you start paying attention to the legislation very carefully. You can read the actual bills on the Library of Congress’ Thomas Site. Follow the legislation. It’s time to become the squeaky wheel.

So what should concerned taxpayers do? Let’s say that some particularly (in your view) onerous piece of legislation is introduced. The best way to combat bad legislation is to let your voice be heard. Call, write, or email your Congressman. If it’s an industry issue, have others in your industry do the same. Contact your trade association. Trust me, if a Congressman gets 2,000 phone calls or pieces of mail on what he thinks is routine legislation he will notice.

Forbes just ran an article stating that no matter who is elected president taxes will be going up. I think that’s definitely true. What I think may be worse is the additional regulatory burden placed on businesses.

This is yet another area where business owners need to become proactive. You may want to subscribe to the Federal Register’s daily email table of contents (the link is to the Federal Register; you can click on “sign up” to head to that page). Americans tend not to act until things become bad. Well, it’s far better to act before that occurs. Again, you and others impacted by proposed regulations need to be that squeaky wheel. If (or perhaps I should say when) you see a particularly onerous regulation being promulgated comment on the regulations. Let your Congressmen and Senators know of the problem.

Some of my friends have asked me what this will do for my business. Perversely, it will be a very good thing. Most professional preparers I know want a simple Tax Code. We’re not likely to see anything like that in the next four years. I’ll earn lots of fees utilizing methods that will save my clients taxes. That’s good for me (and other professional preparers) but bad overall for the economy. Basic economics teaches that a business will want to make a normal profit. If that business must spend more money on my services it will have less money for other things such as expansion, hiring additional employees, increasing salaries, etc. The next four years figure to be good for professional preparers.

Unfortunately, you will have to watch your wallets. Taxes are going up. The only question is how much.

Today is Election Day, and that means you should exercise your privilege and vote. In California, you can go to the Secretary of State’s website to find your polling place.

Measure S is titled the City of Irvine Personal Information Privacy Act. The City Attorney’s analysis states that measure S will comply with state and federal privacy regulations. Proponents believe this measure will aid in privacy for Irvine residents. Opponents argue that the measure is a secrecy ordinance that is unconstitutional under the California constitution.

Remember to Vote on Tuesday.

There are lots of advertisements on local television for Measure R…but they’re for Los Angeles County Measure R. In Irvine there is also a Measure R that’s far different than the Los Angeles County R.

Irvine Measure R would adopt the City Council’s recommendations for the Great Park. According to the city attorney’s analysis, the measure should keep separate funds for the Great Park.

Proponents of the measure state that the measure will protect Irvine taxpayers. Opponents argue that the proponents have already spent $115 million of the $200 million allocated for the project and if the measure is approved other taxpayer funds could be tapped.

[Note: Because the Orange County Sample Ballot is interactive, I cannot link to it. If you are an Orange County voter, go to this site to read it.]

Measure J on the Orange County Ballot would require voter approval of county pension changes. Proponents of the measure believe it would help protect taxpayers and would prevent possible future pension meltdowns. There is no organized opposition to the measure.

Remember to vote on Tuesday.

There are many reasons to vote for a candidate for President. Even though taxes are important they may not be, for you, the most important issue. I strongly advise everyone to review both candidates’ records, their views, and their character, and make your decision. And do vote—we’re blessed in the United States to be able to exercise the privilege.

That said, there are major differences between the two candidates on taxes. (Though I have opinions on other issues I’m only an expert on taxes. I’ll leave the other issues for you to research.) Both candidates promise tax cuts. Senator Obama is generally against extending the Bush tax cuts while Senator McCain want to extend them. Senator Obama has about a trillion dollars worth of new programs; he hopes to fund these by “closing loopholes” and likely by cutting military spending. Senator McCain proposes fewer new programs but his revenue collections would be lower.

Actually, all of this misses an important issue—perhaps the most important issue of all. Under the Constitution, all tax legislation must start in the House of Representatives. Under the rules of the House, said legislation will start in the House Ways and Means Committee. The chair of that committee, Congressman Charles Rangel (D-NY) will end up dictating, to a large degree, what gets in the bill. And here we can look at history to see what this will be like.

In 2007 Congressman Rangel proposed a major tax overhaul. His plan was purportedly revenue neutral. We’re likely to see legislation similar to this. In some ways this looks like Obama’s proposals; in other ways it doesn’t. The major changes (many of which are positive) impact businesses.

So what’s likely to happen if Obama wins? First, the Bush Tax Cuts will die in 2011. There’s no way they can pass Congress, and even if that happened Obama would veto them. That means everyone will have a tax increase in two years.

Second, we’re likely to see even more income redistribution. Wealthier taxpayers will be more heavily taxed. Under Rangel’s 2007 proposal marginal tax rates would have exceeded 50% for the wealthiest taxpayers. Expect that to occur, and this will definitely hurt small businesses and the economy at large. Taxes are just another cost, and if taxes increase, either prices will increase or expenses will be cut. Generally, this will lead to lower employment.

Third, assuming Republicans have more than 40 seats in the Senate the proposals will require GOP support to pass. This will blunt somewhat their impact.

Fourth, given that the Democratic leadership in Congress is far to the liberal side you can throw Obama’s $250,000 figure into the trash can. Today, Governor Richardson stated that the real number is $120,000. In my previous post I said it was $125,000. No matter, it’s not $250,000.

No matter who is elected I do expect a permanent estate tax exclusion to be agreed upon. I expect it to be $3 million, with the estate tax being 50% above that figure. Both Obama and McCain want to see permanency here, so this is the one area where I actually expect bipartisanship to rule.

If McCain is elected the extreme redistribution plans are dead. There’s no way McCain would sign such legislation.

McCain would be able to veto legislation with earmarks, and the Democrats would not have enough votes to override the vetoes. Thus, that’s one plank of McCain’s program that would go through (and it’s a big positive).

The rest of McCain’s proposals would likely never pass unless the American people rose up and forced the issue. They did this in Ronald Reagan’s first term, and he was able to get a major tax proposal through Congress. I think that today’s legislators are far more dogmatic in their stances and I don’t see that happening.

If Obama wins I’ll have more business. Joe Kristan wrote an excellent post on what happens when the top tax rate is increased. It’s extraordinarily harmful to small business, and I don’t like that.

I wish one candidate would have proposed a huge simplification of our Tax Code. Ideally, I’d like to see a flat tax. Yes, it would drastically decrease my business but there are many other things I could do. Regrettably, neither candidate is proposing anything like that.

Instead, we have a choice between change that would harm the economy and likely gridlock. At least with gridlock we’re probably not going to get a worse Tax Code.