Saying so may be cliché, but I am a big believer in looking back on the past year, seeing what went right (and what went wrong) and making New Year’s resolutions. And so, here we go, at 10 pm on January 1, 2013, my top ten New Year’s resolutions:
Resolution #1: I am going to do More of Everything. More exercise, more work, more sleep, more time with friends and family, more deals, simply more of everything. Instead of my usual ten resolutions to do more of this and more of that I decided that, fundamentally, what I really mean is that I am going to do More of Everything. Period. Except of course the things that I am going to do less of, which leads me to….
Resolution #2: I am going to do Less of Everything Else. This would include less red meat, less processed sugar, less overpriced Scotch, less speeding (and less speeding tickets). In a nutshell, Less of Everything Else.
Resolution #3: I am going to buy a television. I swear, this is the year I break down and do it. Growing up on the Northern Plains, we had only one television station when I was young. Thus, we all watched the same lame programs until a second channel came to our town. At that point, a great philosophical divide emerged which threatened our peaceful co-existence – StarTrek or Gilligan’s Island. We could curse the evil network demons for putting the two best shows up against each other in the same time slots, but we still had to choose. There was no middle ground, no TiVO. I was in the Gilligan’s Island camp, by the way (StarTrek didn’t have a “Ginger”), and fought many battles arguing the merits of my position. While I was convinced of the nobility of my cause (Gilligan’s Island offered practical advice, after all. What if you Did get stranded on a deserted island?), the whole experience left me with a bad taste in my mouth for television, so I don’t have one. Not one that works, anyway. I think I’m better now. I think I can handle it. Thus, 2013 = New TV.
Resolution #4: The budget deal sucks (the Biden/McConnell deal). OK, maybe that’s not a resolution, but it just does. It does nothing to address spending and still leaves the US as one of the most highly taxed jurisdictions in the world, right up there with Japan. If you live in California, it is even worse with the recent tax increase called for by Prop 30. Plan on up to 10% state income taxes as opposed to Zero in Nevada, Washington and other states that are now filling up with former Californians. I may not be great at math, but the difference between 10% and 0 is 10%! That means that marginal federal and state rates in California will exceed 50%. That’s a high hurdle for Californians to clear.
Early today (January 1), the Senate passed the American Taxpayer Relief Act. Late tonight, the House passed the ACT and the President is expected to sign it as soon as possible before anyone realizes how bad it really is. The Act will prevent many of the tax increases that were scheduled to go into effect today. The Act will also increase income taxes for individuals with taxable income over $400,000 ($450,000 for married taxpayers, $425,000 for heads of household) to a 39.6% rate.
There is some good news in the Act. A temporary exclusion from gain from certain qualified small business stock is back (for a little while anyway). It would patch the alternative minimum tax (AMT) by raising exemption amounts. The AMT was enacted many years ago to ensure that rich folks who avoid income taxes through fancy tax shelters pay their fair share. Had it not been patched, it would have caught a large percentage of all filers, according to the IRS. Congress really had no choice but to patch this and hopefully they will someday repeal it. The tax rate on capital gains and dividends will go from 15% to 20% for taxpayers who would be subject to the new 39.6% bracket. The rest of the income tax changes are more annoying than significant. The personal exemption and itemized
deductions would phase out for high income individuals. Estate, gift and generation-skipping transfer (GST) tax will not increase, thus mooting a lot of what most of us have been stressing about this past month. Specifically, the exemption level will remain at $5,000,000 (as indexed for inflation) and the top estate, gift and GST rate will rise from 35% to 40%. Bonus depreciation is extended, so if you loaded up your credit card at Fry’s before year end to get the tax bennies, the joke is on you. The temporary payroll tax cut actually was temporary, and is now history. The Act doesn’t deal with the spending side of the equation, but that day will soon come.
So why don’t I like this deal? Because the bill does not touch corporate tax rates, and the rates are still too damn high. All of the recent chatter about the fiscal cliff has sounded like the US tax system is the only system in the world. I’ve got news for you – just like California industry will move to Nevada to avoid state taxes, US intellectual capital will move to more tax friendly jurisdictions to avoid federal tax and, believe me, those foreign
jurisdictions are lobbying for the business. Much like Nevada’s value proposition is “We are Not California” you can expect the rest of the world to continue to sound the theme that they Are Not The US when it comes to taxes.
This is hardly news. Even the Obama Administration recognizes the damage of the flight of technology from the US. Recall that the Administration has proposed taxing US companies on certain income from technology transferred offshore, reflecting its stance of punishing the removal rather than rewarding the return. See The Territorial Tax, or Why Does Congress Hate Technology? The damaging effect of our immigration policy (which mandates the removal from this country of US educated brains and the companies they spawn) has also been beaten to death by almost everyone, including me.
So, as much fun as it was to watch the President make speeches and listen to commentators comment and pundits pund, or whatever it is that they do, we are going to continue to be engaged in a tax rate debate for the rest of the year; indeed, for the rest of this Administration. While that happens, the base will erode and foreign trade offices will continue to set up shop in our backyards. We may not be going over a cliff, but we are rolling down a hill. It’s time for Congress to address these problems before the descent picks up too much momentum to stop.
I had 6 more Resolutions to go, but they just don’t seem so important anymore. Not until we nail this issue of taxes, international competiveness, and the migration of talent and technology from the US to foreign shores.