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Election Reflects America’s Big Divide

EDITOR’S NOTE: As we went to press, Gov. George W. Bush had been certified as the winner of Florida’s key electoral votes, but Vice President Al Gore’s contest of that certification was unresolved. If Gore ultimately is named president-elect, we will explore the implications of his victory in our next issue.

The cliffhanger election of 2000 was like a mirror split down the middle, reflecting an image of two Americas that seem barely to fit within a single frame.

Vice President Al Gore carried every Atlantic state that fought in Grant’s Army save New Hampshire, as well as the West Coast and most of the recently prosperous industrial Midwest. Thus the populist Democrat won nearly all of his electoral votes in the wealthiest parts of the country.

Texas Gov. George W. Bush dominated a huge swath of territory from the Carolina beaches through the Great Plains, the Rockies and the Western deserts, across the Arctic Circle to the oil fields of Prudhoe Bay. Despite Gore’s refrain that the Bush program would give a tax cut windfall to the wealthiest 1 percent of the population, Bush country comprised nearly all the places in the United States where a family is considered well-off to be living on $45,000 a year.

A paradox? Not really. On economic matters, two decades of prosperity have built considerable consensus. Most Americans today tend to favor competition over regulation, free trade over protectionism, lower taxes over income redistribution. Gore probably carried the East and West Coasts in spite of his much smaller "targeted" tax cut program, rather than because of it.

Our great divide is on social matters, most of all abortion but also crime and punishment, school prayer and vouchers, and diversity issues affecting women, gays and minorities. Another area of contention is the role of income maintenance programs ranging from welfare to Social Security, which has both social and economic elements.

Gap Widens On Social Issues

As the two major parties have converged on economic issues, they have grown starkly apart on social questions. Liberal Republicans in the Nelson Rockefeller mold are all but extinct. Conservative Democrats, a Southern fixture not long ago, are a dying breed. Bill Clinton won two national elections by straddling this social divide, but the Bush-Gore race was a much more conventional matchup between the clearly conservative Republican and the socially more liberal Democrat.
I do not believe Bush supporters were motivated mainly by his economic program, any more than Gore’s backers were deterred by Gore’s. Rather, in a time when most Americans are pretty well off, the voting on both sides seems to have been driven mostly by the social questions that divide us pretty neatly, and very evenly, along regional lines.

Ultimately the presidency was decided in Florida, which, after decades as a migration magnet, really is three states in one: A Northeastern clone in the Miami metropolis; an eternally warm Midwestern suburb in the southwest from Naples to Tampa, and the Deep South from Orlando to the state’s northern border.

The same narrow division along regionally driven social lines shows up in Congress. As I write this in the wee hours of the morning after Election Day, Democrat hopes of regaining majorities in the Senate and House of Representatives also appear to be dashed. For the first time since the 1950s, Republicans control Congress and the White House.

This is not quite as dramatic a development as it first appears. Democrats held the House during the early years of the Reagan presidency, but the Reagan tax program passed easily when Speaker Tip O’Neill could not keep his then-aging but intact conservative wing from defecting on key votes. Since that time, tax and economic policy on Capitol Hill has tended to be forged by bipartisan agreement, although in the past few years deadlock between Congress and Clinton has virtually frozen the tax laws.

Get ready for a thaw on the scale of global warming. Congressional Republicans already have shown that they can put together a majority for significant changes in the gift and estate tax laws. Come January, a president will be in office who is prepared to sign those changes into law rather than veto them.

What changes can we expect, and how should we prepare for them? Here are my suggestions:

Income tax rates will be cut. Republicans on the Hill will be keen to deliver the key element of the Bush tax program. Judging from what happened in the Reagan-era reforms of 1981 and 1986, a lot of Democrats will climb on the bandwagon rather than try to explain a vote against a tax cut in the next elections.

  • Strategy: Income deferral looks pretty good, since no cut will take effect before 2001 and, even then, it may be phased in over several years. It also may be smart to accelerate deductions, especially large charitable contributions. But beware of the…

Alternative Minimum Tax, which will be eased or repealed. Only seven people in the country understand the AMT, though many thousands are affected by it. Forgive the slight exaggeration about the seven people (the actual number may be smaller), but the AMT is very confusing. It also is difficult – sometimes impossible – to plan around. AMT is basically a parallel tax system in which some common deductions are disallowed or limited, and some income is increased or accelerated. This results in higher taxable income that is taxed at a lower rate (28% top federal bracket, versus about 40% for regular tax). If the AMT is greater than your regular tax, you pay AMT. The AMT was designed to ensure that very wealthy people were forced to pay some tax regardless of how many deductions they could claim. These days, it increasingly hits upper-middle-class taxpayers, especially in states with high income taxes.

  • Strategy: Defer deductions that may put you into AMT, and keep rolling over those deductions until, one hopes, the AMT is repealed or relaxed in some future years. For example, if you may be subject to AMT in 2000, defer paying fourth-quarter state estimated income taxes until January 2001. This is the reverse of the usual strategy, which is to make that payment in 2000 to claim the federal tax deduction this year. Next year, if AMT is still a threat, defer your fourth quarter 2001 estimated payments until January 2002, and keep using this strategy until the AMT threat goes away.

Don’t make taxable gifts! Congress voted this year to gradually repeal the estate and gift tax system. Clinton vetoed the bill, but Bush has backed repeal, and this is a high priority for GOP leaders on Capitol Hill. Even Gore was in favor of liberalizing the tax. In the past, advisers have pointed out that it is less costly in many cases for donors to make taxable lifetime gifts to children and grandchildren, and pay the resulting taxes, than it would be for the donor to retain assets and have his or her estate pay tax at death. This is only true if we assume that there will be an estate tax in the future. For now, go ahead and make gifts – but do so within the tax-free allowances that are available to you. This includes the annual $10,000 per recipient that you can exclude from the calculation of taxable gifts, the $675,000 lifetime allowance known as the unified credit amount, which already is scheduled to rise to $1 million by 2006, and the unlimited exclusion for payment of medical and education expenses on a donee’s behalf.

If gift and estate tax is repealed or eased, act fast. Just because the tax is changed does not mean it will stay changed. The 1986 tax law cut top income tax rates from 50% to 28%. By 1993, a couple of overt and back-door tax hikes had brought the rate back up to about 40%. People who accelerated discretionary income in the interim were glad they did. If gift and estate taxes are repealed, or if the unified credit exemption amount is boosted, act quickly to take advantage of what may be a limited window of opportunity. Dylan Kehoe’s article on valuation discounts discusses an important planning technique, the family limited partnership, that makes it easier to make gifts for tax purposes while letting the donor retain considerable control – and, often, get a discount on the taxable value of the gift.