Over the last few weeks, I have been monitoring the debate in Washington about tax rates for 2011. As a CPA who advises clients on tax startegies, it's my job to keep up with this. Though I feel it’s unfortunate that congress waited to the last minute to address the issue, it has given all Americans a look at how tax laws are negotiated in our country.
On a news program last week, one of the commentators said someone wanted pass “permanent tax rates”. What I think they meant is that someone in congress wanted to make the current tax brackets the law, instead of just extending them. That sounds good in theory, but in practice there is no such thing as permanent tax rates. Congress always has the power to adjust the rates and tax rules any time they feel changes are appropriate.
It would probably help the economy if there was a set of tax brackets and rules that could be kept in effect for an extended period of time. But in the current political climate I don’t see that occurring.
If businesses and individuals knew what their tax burden would be and the tax rules that would be in effect several years down the road, they would probably be more inclined to make investments that would help the economy. Without this, you have what Donny Deutsch described last Friday on MSNBC’s Morning Joe (transcript) as $2 trillion dollars that business is holding on the sidelines and not investing because they don’t know if Washington is going to be pro- or anti- business in the coming years.
Hopefully, the tax rate compromise will ease some of these fears and provoke businesses and individuals to start investing again.
But as all tax preparers know, there is no such thing as long-term tax planning because tax rules can, and often do, change.