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The Best Tax Law Money Can Rent

Congress used to give us the best laws money could buy. Nowadays, however, the legislative process is not for sale; it can only be rented.

After a mere decade of dithering, last night Congress got around to telling us what income, gift and estate taxes will look like — for the next two years. Then we’ll renew our debate about “permanent” tax laws.

Ridiculous? OK. Irresponsible? You’ll get no argument from me. But in its own bizarre, things-look-different-in-Washington way, it makes sense, both as politics and as policy.

Consider, first, the political facts of life. Controversy keeps voters fired up and campaign contributions flowing. Therefore, if you are a legislator, keeping a controversial issue alive is a good thing.

To lawmakers, the tax cuts that were passed under President George W. Bush in 2001 and 2003 are the gift that keeps on giving. From the minute those laws were enacted, Congress has debated what to do when the lower rates expired and the estate tax returned at the end of 2010. Each side went to its financial backers and its political base over and over again. Meanwhile, taxpayers and professional advisers looked on incredulously at the prospect that we would not know until literally the closing weeks of the year what the laws would be on New Year’s Day.

Around this time last year, Congress finally gave up on efforts to extend the estate tax, which lapsed in 2010. Now, we finally know that, for the next two years, we will have gift and estate taxes at a 35 percent rate that will apply to transfers exceeding $5 million.

What happens after that? It’s anybody’s guess — but your representative in Washington is ready to keep fighting this fight on your behalf. And your representative’s campaign committee is ready to accept your contribution.

But there are policy-based, as well as political, reasons for the latest tax compromise. No politician wants to derail a U.S. economic recovery just as consumers are beginning to spend and companies are starting to hire again. The 2-percentage-point reduction in workers’ Social Security taxes in 2011 is expected, by itself, to add at least a least a half-percentage-point to the economy’s growth next year. Allowing a major tax increase to take effect next month would certainly have put the brakes on the nascent expansion.

That is a price I would have been willing to pay, but mine is very much a minority view. As I have written here previously, I believe the long-term solution to the federal budget crisis is to make every American of reasonable means — wealthy and middle-class alike — bear a fair share of the government burden. That would mean higher taxes and less growth right now, and lower taxes when we get runaway government spending under control.

My point of view never had much of a chance. Once the November elections gave the Republicans enough leverage to get what they wanted in a tax bill, it was a foregone conclusion that the Bush-era tax cuts would be extended, either in this lame-duck session or, retroactively, when the next Congress took office in January.

President Obama has the most at stake in getting the economy restarted. He has spent two years blaming his predecessor for the faltering recovery after the 2008 market crash. Last month’s elections demonstrated that the finger-pointing is not working. If unemployment stays anywhere close to its current 9.8-percent level beyond early 2012, Obama will be a one-term president, and he knows it.

Continued high unemployment would also cost the Democrats control of the Senate in 2012. So Obama had no choice but to pay the price Republicans demanded. Senate Democrats saw things the same way, helping to pass the two-year compromise on an 81-19 vote earlier this week.

The House of Representatives already is a lost cause for Democrats. Outgoing Speaker Nancy Pelosi’s valiant class warriors railed against the new bill’s extension of lower tax rates for high earners and, especially, the 35 percent rate and $5 million exemption for estate and gift taxes. Yesterday, 194 representatives, all Democrats, voted to reject the estate tax component of the deal and revert to the 45 percent rate and $3.5 million exemption that prevailed in 2009. The effort failed when 60 Democrats joined all of the House Republicans to oppose it. (Had it passed, the tax compromise would have blown up and the issue would have gone to the next Congress.)

Having made their point, nearly 80 Democrats then dropped their objections to help approve the final tax deal. These Democrats did not like the tax benefits for the people they call “the rich,” but they liked the idea of making their constituents pay higher taxes even less.

In case you’re wondering where Speaker Pelosi stood on the issue, keep wondering. Pelosi chose not to vote. I guess she figured there was no upside in taking a stand too soon. After all, the tax issue is going to be back on the table in just two years.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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