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House Tax Stimulus Bill Hijacked
By Stephen Breitstone
Long Island Business News
November 9, 2001
The U.S. House of Representatives recently
passed legislation that was widely touted as the tax stimulus
package required to "fix" the economy, which has
stalled in the wake of the Sept. 11 terrorist attacks. Upon
closer scrutiny, this legislation seems more like a feeding
frenzy for special interest groups that is merely wrapped
in a stimulus package.
Could it be that the special interest groups and the legislators
that represent them are taking improper advantage of the
current climate and outcry for a tax stimulus package to
further their own agenda? I had hoped that in the wake of
the World Trade Center tragedy, we had somehow transcended
politics as usual. The jury is out.
Perhaps after the Senate produces a bill, the makings of
a compromise that represents a true stimulus package will
emerge.
Nevertheless, the first salvo passed by the House falls
far short of the mark. The problem is the House bill unabashedly
puts money in the hands of big business at the expense of
providing meaningful stimulus for individuals and small
business.
Most egregious is the repeal of the corporate Alternative
Minimum Tax and refunding of AMT credits. The passage of
the corporate AMT as part of the 1986 tax legislation introduced,
for the first time in many years, the possibility that large
corporations would actually pay income taxes. Before that,
there existed a cottage industry of tax shelter products
that virtually insured that with proper planning, large
corporations would not have to pay income taxes.
Some say that putting these funds back in the hands of
large corporations will create jobs. It might, indirectly.
But are these the best jobs to create? I think not. We should
not forget that most of the job creation during the 1990s
resulted from a renaissance of entrepreneurial spirit and
technological innovation that germinated at the level of
the small business.
Big business will get enough of a boost from reduced interest
rates and the government contracts and spending resulting
from the war effort. They do not need further tax subsidies.
The emphasis of the tax package needs to be to put money
in the hands of the consumer to bring them back into the
market. Also, there is a need to encourage individuals and
corporations to invest risk capital in small and emerging
businesses.
In many ways, small businesses and entrepreneurs are already
at a disadvantage under our tax system. There is no justification
for limiting deductions for health insurance for small businesses
operating as partnerships, limited liability companies and
S corporations. The costs of health insurance of those entities
should be made fully deductible immediately. Maximum individual
income taxes - 39.6 percent - are higher than maximum corporate
income tax rates - 35 percent.
Also, relief should be afforded those individuals who paid
tax on stock market gains that evaporated. They paid tax
on the gains without limit, but the losses are only deductible
up to $3000. The House Bill does increase that amount to
$4,000, but the increase is unlikely to materially alter
economic behavior.
Likewise, relief should be given for those who exercised
stock options, paid their taxes, only to see stocks decline
in value so they to were taxed on gains they never realized.
And the those dreaded passive activity loss rules (section
469) have created a tax disincentive for individuals to
invest in ventures. Those rules should be relaxed or repealed.
Finally, the estate tax repeal legislation passed earlier
this year needs to be fixed. It now provides for a full
repeal of the tax for one year only (2010). That law represents
bad tax policy. There is tremendous uncertainty as to whether
the repeal will ever go into effect or become permanent.
Owners of small business - among the principal intended
beneficiaries of the repeal - cannot properly plan in light
of this uncertainty. Ultimately, the lack of certainty will
damage many small businesses who make the wrong bet on whether
estate tax repeal will stick.
Stephen Breitstone is a tax law partner with the Mineola
law firm Meltzer, Lippe, Goldstein & Schlissel and can
be reached at 516-747-0300 ext. 146 or sbreitstone@mlg.com
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