TAX DAY STRESS AND ICEBERGS

THE LAST GOOD YEAR?

April 17 (an anomaly for 2012 as tax day usually falls on April 15) has passed and those who have already filed their annual income confession can breathe a sigh of relief. Those on extension are still taking tranquilizers. Tax time is always worrisome and often painful but April 2013 promises more worry and pain than in recent memory. Truly, “Tax Day is the one day a year we’re all conservatives.” (Scott Stantis, comic strip, “Prickly City”)

TAX DAY STRESS AND ICEBERGS

A study, recently reported, found that auto accidents spike on April 15 of every year. It is also known that the Titanic, hit an iceberg at 11:40 PM on April 14, 1912 and went to the bottom of the sea at 2:20 AM on April 15. On board were numerous wealthy elites including Astor, Widener, Guggenheim and Levi Straus, the founder of Macy’s, all of whom had amassed great fortunes without paying income taxes. In fact, the 16th Amendment permitting a direct tax on income was not ratified until February of the following year. Could this have a harbinger of the coming tax scourge? Did the long arm of the coming great tax God reach up and grab those untaxed wealthy by the scruff of their silk lapels and pull them down? Were they rocking the boat against Stubby Kaye’s song warning, in the Broadway Musical show, “Guys and Dolls”(Frank Loesser), “Sit down You’re Rocking the Boat”, “or, the devil will drag you under?” Or, was this William Butler Yeats’ prophesy:

“The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned”

(Poem, “The Second Coming”)

The Titanic sinking was the 9/11 of that era, shattering confidence. People began to wonder, Walter Lord in his book “A Night to Remember,” (made into the starkly realistic movie of the same name), states, “If wealth meant so little on this cold April night, did it mean so much the rest of the year?” Life can be equally and helplessly fragile for the rich and less fortunate alike.

FAIR DEBATE OR CLASS WARFARE

Warren Buffett initiated a debate when he suggested that the rich should willingly pay more in taxes as a matter of fairness. For a more comprehensive discussion of fairness in the tax system see Steinberg Talks Tax™, July, 2011, “Is Tax Reform on the Horizon?” Some wealth advocates have criticized the so called “Buffett Rule,” (Not to be confused with Jimmy Buffet’s rule for wearing “flip flops” and “sipping “Margaritas”) arguing that the income disparity favoring the rich 1%, that the 99% criticizes, raises the standard of living for all Americans, by encouraging rick taking investment in new endeavors (Adam Davidson, “Are the Rich Worth a Damn?”, NYT Magazine, 5-6-12). Others question whether $250,000 adjusted gross income is the proper touchstone for calling one rich (Per IRS 2% of tax filers). Nonetheless, many economists point out that investment and risk taking persisted during the 1950s, 60s and 70s when the highest marginal tax rate was 70%, and during the Reagan years when the highest rate was 50%. Regardless of one’s opinion about taxing the rich and fairness, a tax on the rich alone will do little to reduce our budgetary crisis. And, in 2013, unless congress acts, tax rates will rise precipitously for both rich and middle class Americans. We all may be looking for our “lost shaker of salt.” Perhaps a bit of salt does make for the perfect Margarita, but it will take more than salt to concoct a simpler and fairer tax code.

COMING TAX RATE ARMEGEDEN

Looking at 2013, below is a chart of the coming tax highest marginal tax rates compared with 2012 rates:

INCOME CATEGORY 2012 2013

Ordinary (like wages, Net Short Term Capital Gains, NQ dividends) 35% 39.6% (1)

Medicare tax – on earned income 1.45% 2.35% (2)

Net Long Term Capital Gains 15% 23.8% (1), (3)

Qualified dividends 15% 43.4% (1), (3)

Interest, rents, royalties 35% 43.4% (1), (3)

ESTATE/ GIFT/ GEN SKIPPING TAXES 2012 2013

Highest tax rate 35% 55%

Lifetime exemption $5.12 million $1 million

(1) Due to expiration of “Bush tax cuts”.

(2) Due to slated 0.9% increase in Medicare tax.

(3) Due to “Obama Care” 3.8% add-on tax rate on unearned income of single filers with Adjusted Gross Income over $200,000 ($250K for joint filers; and $125K for married filing a separate return).

IMPACT ON STOCK PRICES

It has been predicted that the stock market will crash as a result of dividend yields being lowered by higher tax rates. (Donald L. Lushkin, “The 2003 Fiscal Cliff Could Crush Stocks” (NYT, 5-6-12). I have learned that predicting the stock market is a fool’s exercise. As Erik Larsen, author of “The Devil in the White City,” notes, “The future is incredibly opaque.” People invest in U.S. markets for many reasons, dividend yield being one. But, no one factor, in a tumultuous world investment environment is solely responsible for stock market trending movement. What will happen to stock prices over time will depend on what is going on in the political and economic world, a confluence of factors. Focusing on individual rates also ignores the impact of the dichotomy in our unique tax system between the corporate tax structure and individual tax system that the well healed have been able to exploit in reducing overall tax burdens.

NUCLEAR CORE OF CONFLICT

The state of affairs we face devolves from congressional paralysis due to both politics and ideology. We are in a presidential election year and neither party wants to concede to the other any victory that might be used as propaganda. There is also an essential ideological divide over the role of government, the Republicans wanting more of a non- but-egregious-penalty- calling referee and the Democrats envisioning government as an active participant in the game. These are legitimate questions that ideologists with rigid mind sets and agendas cannot hope to realistically answer. Worse yet, we are left to tackle these problems with “celebrity politicians and shoot-from-the-hip pundits.”(Brian Anderson’s WSJ review of book, “Power and the Professors,” by Mary Ann Glendon). We need the political genius and searing intellect of the likes of Jefferson, Adams, Hamilton and Lincoln.

SOLUTIONS WILL BE HARD TO FIND

An Ideology closes and locks creative doors. Ideology brims with assumptions. Assumptions are dangerous things. Back on the Titanic, many intelligent women would not get in the life boats believing to the end that the ship, the pinnacle of technological achievement, was, as advertised, “unsinkable.” The lifeboats, only having a capacity for one-half of those on board, nevertheless, went off with 100 empty seats. Today, we think more about what we are doing, where we are going and who or what we will be seeing than about ideas. Jurors threaten the sanctity of our cherished right to a trial by peers by tweeting to friends about their experience (“it’s all about me”) instead of thinking about their responsibility. Ideas that are germinated, are largely those that can make money. Where are the great thinkers like Plato or Edmund Burke? One author questions, have we entered a post-idea period? (Neal Gables, “The Elusive Big Idea,” NYT, 8-4-11).

I do not know the answer, but I do know that solving the problems we face, tax reform included, will require wisdom, intelligence and courage. Regrettably, I see little evidence of those ingredients in our current crop of elected representatives and leaders.

In a recent Pickles comic strip Earl is sitting on a bench talking to his friend:

Friend: What kind of a sandwich is that, Earl?

Earl: It’s a regret sandwich.

Friend: A regret sandwich? What’s that?

Earl: It’s the kind of sandwich where you regret you don’t have something instead of bologna between the bread.

We must ask ourselves: what kind of a country do we want? Do market values trump social values? Is Gordon Gekko correct when he says, “Greed is good?” (Michael Douglas’ character in film “Wall Street). How do we balance these two forces in our society? Viktor Frankl, Austrian neurologist, psychiatrist and Holocaust survivor, said:

“What man actually needs is not a tensionless state, but rather the striving and struggling for some goal worthy of him.”

Our own personal state of mind, security and the national identity of this country will turn on the resolution of difficult issues at hand today. Tax reform is one of those issues. Some other pressing questions:

 How do we create and enforce an intelligent immigration policy?

 How do we re-structure our safety-net programs to insure stability at a sensible level of benefits over the long haul?

 How do we provide better and more cost efficient health care to both our young and aging population?

 How do we protect citizens from terrorism and continue to protect our liberties from state encroachment on our rights?

We will make our destiny for the better in answering these questions, only through creative thinking, mutual compassion, kindness and compromise. I look forward to discussing these issues with you and to working with you on planning for the tax, financial and legal challenges that changing times impose.