11 January 2010

Tax Without Extenders

Not only did Congress leave us with an estate tax mess, it also left us with the mess of a tax code without "extenders", tax incentives of temporary duration that are routinely extended to future years, such as the research and development tax credit. A long list of provisions that expired at the end of the year is summarized at the Tax Profs blog.

A few provisions actually lapse each year, often replaced with new incentives. But, the entire list of temporary tax breaks almost never disappears all at once. These incentives, designed to get businesses and households stimulus that will help the economy, work particularly well if people don't know if they will be retroactively restored or not, which is where we are now.

Congress could do better. It could make provisions that deserve to be permanent and routinely get extended permanent, and pass as temporary, only provisions that really need to be temporary (like provisions related to a specific national disaster or war). But, since the likelihood that temporary tax breaks will be extended doesn't figure into the budget process, they provide a way for Congress to look like it is planning for a smaller deficit than is really likely.

This year, the main force holding up the extenders bill was a provision to tax "carried interests," the incentive based component of private investment funds like hedge funds, as ordinary income (or at a higher than capital gains tax rate) rather than as a capital gain with a top tax rate of 15%. Until there is a deal, tax planners and the businesses and households that rely on them, will have to take action for the current year based on guesswork, not knowing what the tax code that they will be subject to will look like when it is finally adopted.

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