The Taxes Are Coming! The Taxes Are Coming! Or AreThey?

Congress is on the cusp of passing the most munificent tax break in history for trial lawyers taking on contingency-fee lawsuits, while letting Bush’s tax cuts expire. Are they really looking out for us? It’s a tax break to the tune of $1.6 billion, one that’s designed to let attorneys deduct fees and expenses up-front that are related to their cases. That’s right, $1.6 billion, just in case it didn’t sink in.

Linda Lipsen, the senior vice president of public affairs for the American Association of Justice, is in the forefront and leading a pack of lobbyists to do just that. At an American Association of Justice conference in San Francisco she outlined the exact strategy of how to attach a tax break to some other piece of important, must-pass legislation to a group of trial lawyers in the Birth Trauma Litigation Group.

Quoth Ms Lipsen: “Everyone wants to do it, but the problem is there is not a tax vehicle yet. You cannot have a stand alone bill to help lawyers ¾ so, we have to tuck it into something.”

To date, the expenses this group seeks to deduct are considered loans to clients and gets repaid in the form of awards if the suit is won. If not, the expenses are deducted upon the resolution of the lawsuit. That seems fair, but in fact, the argument is that it’s unfair to the trial lawyers. You see, the lawyers and Ms Lipsen believe they should be able to deduct the costs in the year they are accrued, regardless of litigation.

Please, are you kidding me? We’re not talking about bourgeois attorneys here. We’re talking about a very affluent, very rich, coterie of individuals. A group of people to which our meager salaries pale in comparison. I think they can afford to defer the costs. And what about the government looking out for the “small” people? Are these the small people of which they refer? Where are the liberal minded people in this argument? Those who claim to have the common man’s best interests at heart. The ones who would condemn Republicans and President Bush if they were to do something this dastardly. Well, I’ll tell you.

Lipsen went on to say the AAJ was working to fix the problem and bragged about the support the association had. She told the group that the Senate Majority Leader, Harry Reid, was leading a delegation that gave support to the cause. Senate Finance Committee Chairman Max Baucus, D-Mont., House Speaker Nancy Pelosi, D-Calif., and the House Ways and Means Chairman Charles Rangel, D-N.Y., are all on board and part of the coterie. What? I’m shocked. Are these all Democrats? Where is the bipartisan support?

One of the problems she denoted was there wasn’t a “politically palatable vehicle” to carry the legislation through. Another was cost. Congressional rules require that any tax break is to paid for by new revenues.

“The problem for us, unfortunately, is there is no money,” Lipsen explained. “It costs a couple billion. So, we’re going to have to find what they call a ‘pay-for’ so that we can make it budget neutral and get it passed. This is going to be tough because there is no money.”

She went on to say the senior congressional officials she mentioned wanted to go forward with the legislation.

“Right now all these senior Democrats are saying, ‘let’s do it.’ So again, let’s cross our fingers.”

Why would these Democrats want to do such a thing? Simple. Lawyers are extremely politically active creatures, they give billions to politicians. Since the 1990 elections their politically active committees have given more than $1 billion in support of various candidates, of which three quarters have gone to Democrats. Does that explain it?

What’s my take on all this? Lawyers support lawyers, however, the preponderant issue is that it would father thousands of additional lawsuits across the nation, especially class action lawsuits. Offsetting the high cost of filing would give the incentive to attorneys to do just that, because they could write off the up-front costs in order to pursue them.

But let’s go back to the Bush tax cuts that are due to expire at the first of the year. I would like those who do not know what they are and how they will affect each and every one of us to understand what the far reaching ramifications are.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was passed by the House on May 16^th, 2001, and by the Senate seven days later. On June 7^th, 2001 it was signed into law by President Bush. EGTRRA made sweeping reforms with regards to the Internal Revenue Code. It significantly reduced income tax rates, made changes in the estate and gift tax provisions, qualified retirement plans and plan rules, created educational savings incentives and reduced capital gains and dividend interest tax rates.

Then we had the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). It was passed by the United States Congress on May 23, 2003 and signed by President Bush on May 28, 2003. JGTRRA was an extension and a more comprehensive approach to the tax reforms contained in EGTRRA. It accelerated the gradual rate reduction of income tax and increased the credits passed in EGTRRA. Also the child tax credit was increased to what it was intended to be in 2010. “Marriage penalty” relief was accelerated as well as giving an increase to the threshold to which the alternative minimum tax applied.

JGTRRA augmented the percentage rate that equipment and other items could be depreciated, in addition to the amount one could choose to “expense off”. The latter allowing one to deduct the full cost of the item from their income without having to depreciate it over a term. The Act also simplified and decreased capital gains tax rates from 8%, 10% and 20% to just 5% and 15%. Further more, the tax rate on qualified dividends was reduced to the same rate as capital gains, something Obama wants to raise.

In April the Senate Budget Committee passed a 2011 fiscal budget resolution that included an increase on dividends from 15% to a whopping 39.6%. That’s a 164% increase folks. That is not within the pale of Obama’s promise. Nor is it what his economic advisers proposed in 2008.

Quoth Obama: “The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.”

We’re not even entering in the equation of a 3.8% surcharge on all investment income here, including dividends, beginning in 2013 to support the recently passed health-care bill. That would almost triple the dividend rate to 43.4% in Obama’s first term as president. Taxes are coming ladies and gentlemen, whether you believe it or not.

But how precisely will the sunset of these tax cuts affect us, the ordinary, every day working man? How many of our elderly do you suppose depend on dividends as part of their fixed retirement income? Such as annuities, investment trusts, bond funds, et al. Millions of Americans receive dividend income, not just the wealthy. I know I do, and I’m far from wealthy.

I also remember Obama’s campaign promise in 2008 about not raising taxes. What happened there? Sidebar ¾ what ever happened to the promise that retirees making less than $50,000 a year wouldn’t pay any federal income tax? I don’t know.

But wait, there’s more. If you’re getting a $1,000 tax credit per child now you’ll only get $500 next year. Then if we go back to the 1999 tax rates the marriage penalty will affect all peoples, rich or poor. That is if one considers making $32,000 a year poor. Let me give you an example.

If we have a couple, say Jim and Joan, and they both work making $32,500 a year each, their tax liability today is mitigated (thanks to Bush) compared to what is was in 1999. Filing a “married-joint” tax return in 1999 Jim and Joan would of had a tax liability of $9,055. They would have gotten the pleasure of paying $1,431 more, almost 20%, than they do today. Solely for the privilege of being married, and all predicated on the married, filing jointly incentives Bush put into place.

EGTRRA created a new 10 percent tax rate and the income bracket married couples had to achieve in order to pay that rate became twice as high as that of single filers. This eliminated some of the marriage penalty. The 2001 tax act also doubled the standard deduction for non-itemizing couples, but only gradually and extending out until 2009. However, this is where JGTRRA came in. The new law, JGTRRA, accelerated the doubling to 2003 and 2004. EGTRRA also doubled the income bracket for married couples in the 15% bracket and was suppose to phase these changes in between ‘05 and ‘08. JGTRRA sped that tax reform up so it would take place in ‘03 and ‘04.

But there is more to my point than just “marriage penalty” relief, and herein lies my second point. It also addresses lower earners, the less wealthy segment of our society. I thought Obama and the Democratic Congress were all about helping the little guy. Why would they let Bush’s tax cuts expire? Let me give but one more example. This one would be about estate and gift taxes and the inheritance tax, or the “death penalty” if you will.

Today Carl’s business is worth $4 million dollars, but Carl is seventy years old and on the verge of death. Carl also has two sons who he wants to leave the business to, but unfortunately he has a bit of a predicament. You see, the estate and gift tax relief has come to an end and is now being threatened by the Obama administration. With a threat of letting the Bush tax cuts lapse, and the implementation of a 55% tax on estates valued at more than $3.5 million, Carl’s estate is in real trouble. So what happens to Carl’s business?

Upon his death the son’s inherit the business, but because of the draconian tax laws they only retain a value of approximately $1.8 million, 45%. That’s a relative figure because we aren’t certain how the state tax will be applied, which was another perk of the EGTRRA. Anyway, the sons decide, based upon consultation from attorneys and accountants, that the best thing to do is liquidate the holdings because the profit margin from the company would take years to recover the 55% tax burden. So they take the money and run. And then what happens?

The family, the sons, receive less than half of what their father worked all his life to achieve. After twenty years of toil Carl eventually employed 328 people at the mill, now they’re all out of work. The community, from the ice-cream store to the general store, depended on the mill for the bulk of its income and has now become a ghost town. So what do we have here? A decimated family, 328 people out of work and now on the dole, and a community that is all but boarded up. For what? So the government can take some of the average, working man’s money and do with it what they please? Unfortunately that is the way it appears.

I have one thing to say about this. Obama is like a genius without any of the novel accomplishment of the same.

All the aforementioned tells an epic tale, yet poses multiple and somewhat troubling questions. Should Bush’s tax cuts, those that succor lower to middle-class incomes, be left to expire? All the while a $1.6 billion tax credit to fat-cat attorneys is set to be implemented. Is this Administration and Congress really about helping the middle-class, the regular Joe? From what I see, I’d say no. By the way, did anyone notice during the House vote for JGTRRA that 99.6% of the Republicans voted yea while 96.6% of Democrats voted nay? And in the Senate it was 48 Republicans in favor to 46 Democrats being opposed. What does all this tell you? I’ll let you decide.