From the weekend’s Economist:<\/strong><\/span><\/p>\n The mid-terms<\/strong><\/span> Barack Obama and the United States are both doing a little better than Americans seem to believe.<\/p>\n IT TAKES an effort these days to recall the thrill that surged through the world when Barack Obama was elected America\u2019s president. It was not only that he was the first black person to assume the globe\u2019s greatest office. He seemed to be preternaturally thoughtful, dignified and decent; a man who could heal America\u2019s wounds at home and restore its reputation abroad. Though too many were swept away in a collective longing to see hope triumph over experience, none of it seemed wholly unreasonable at the time. Yes, many thought, he can.<\/p>\n Two years later, the magnitude of the let-down is palpable everywhere; and at home the president is caught in a vice. To many on the left, he is a cowardly compromiser, whose half-baked plans to get America back to work have done little to help those who voted for him, and whose health-care and financial reforms were gutted at the behest of special interests. To many on the right, he seems a doctrinaire spendthrift who has squandered trillions of dollars on wasteful bureaucracy, mortgaging the future while failing to grapple with the present. To centrists who backed him, including this newspaper, he has been a disappointment, his skills as a president falling far short of his genius as a campaigner.<\/p>\n It looks as though an angry America is about to exact its revenge, giving Mr Obama\u2019s Democrats a painful kicking in the mid-terms on November 2nd. The likeliest outcome (see article) is that the Republicans will take back the House of Representatives and make solid gains in the Senate, where, though falling short of majority control, they will effortlessly be able to block any bill they wish. But, in our view, the rage directed at Mr Obama is overdone.<\/p>\n Consider the main reason why Americans are angry: the economy. The slow pace of job re-creation is primarily the result of consumers and companies trying to rebuild their finances. Balance-sheet recessions always take time to recover from. Mr Obama is guilty of promising that the pain would be over sooner than was ever likely. But he did not cause the bust, and he deserves more credit than he is getting for steering America clear of a much worse fate, especially considering the constraints of a political system designed to make big changes difficult. He was right to go for a big, bold and immediate stimulus plan. He has been right to resist, with minor exceptions, calls for a wave of protectionism. He is guilty of having no credible medium-term plan to reduce the deficit. But then nor do the Republicans; and it was they, after all, who oversaw the tax cuts, the entry into two wars and the financial collapse that are the source of most of America\u2019s gigantic deficit.<\/p>\n In other policy areas, too, Mr Obama has got some big things right. He was correct to try to deal with a dreadful system that leaves tens of millions of Americans without access to health cover, though he should probably have postponed doing so until the economy had recovered. In foreign policy, he has made generally sensible decisions about Iraq and Afghanistan. Many of the people he has retained or put in place have done well, including his ex-rival, Hillary Clinton.<\/p>\n So what went wrong? The answer is a series of smaller things\u2014rhetoric, details, execution, even an aloof vagueness\u2014that have cumulatively undermined his presidency. He has made enemies of the businessmen who are needed to drive forward America\u2019s recovery, haranguing them as fat cats and speculators. He has even, as we report here, forfeited the goodwill of America\u2019s most dynamic and entrepreneurial asset. Silicon Valley, which once saw Mr Obama as a promising start-up, now sees him as a bad investment.<\/p>\n His decision to leave details to others has also cost him dearly. By choosing to subcontract the stimulus, health reform and finance reform to the Democratic leadership, he ended up with shoddy bills that Republicans could safely vote against and that many Democrats are now anxious to distance themselves from. A more accomplished president would have controlled that process better, and found ways to make the Republicans offers that they could not refuse. Mr Obama\u2019s macroeconomic soundness has been undermined by the Democrats\u2019 tendency to meddle with microeconomics, leading to a health bill that imposes onerous requirements on business and a stimulus bill larded with pro-union giveaways.<\/p>\n America is now an uncharacteristically uncertain place. Abroad it seems unsure of who its friends and enemies are. At home there are too many imponderables: over how the health bill will play out in practice; over what might happen to energy prices if carbon-pricing is resurrected via executive action; most of all, over what Mr Obama can do about those yawning deficits. People do not like uncertainty; so if Americans are angry, it is hardly surprising.<\/p>\n Mr Obama seems curiously unable to perceive, let alone respond to, the grievances of middle America, and has a dangerous habit of dismissing tea-partiers and others who disagree with him as deluded, evil or just bitter. The silver tongue that charmed America during the campaign has been replaced by a tin ear. Some blame this on an emotional detachment his difficult upbringing forced on him, others on the fact that he has lived all his life among tribal Democrats. Whatever the reason, he does not seem to feel America\u2019s pain, and looks unable either to capitalise on his administration\u2019s achievements or to project an optimistic vision for the future.<\/p>\n Which ought not to be so hard. Despite its problems, America has far more going for it than its current mood suggests. It is still the most innovative economy on earth, the place where the world\u2019s greatest universities meet the world\u2019s deepest pockets. Its demography is favourable, with a high birth rate and limitless space into which to expand. It has a flexible and hard-working labour force. Its ultra-low bond yields are a sign that the world\u2019s investors still think it a good long-term bet. The most enterprising individuals on earth still clamour to come to America. And it still has a talented president who can surely do better than he has thus far.<\/p>\n So where does Obama stand? <\/strong><\/span>The New York Times interviewed presidential historian, Professor Garry Mills. I found Mills comments enlightening:<\/p>\n As a presidential historian and emeritus professor at Northwestern, you’re well aware that the Democrats are facing the likelihood of an electoral setback this Tuesday. Yet President Obama continues to be the object of scathing criticism among Democrats, including yourself. Why won’t you give him credit for getting things done? You’ve accused him of excessive ingratiation, or “omnidirectional placation,” as you wrote in a blog post for The New York Review of Books. You were invited to the White House for an off-the-record dinner during Obama’s first year in office, along with some other presidential historians. Can you tell us what advice you gave him? We were already there, so I assume you’re referring to the deployment of additional troops. How did he respond? That’s surprising, especially since you describe him as a placater. And now for the great tax Tsuami.<\/strong><\/span> Courtesy InvestmentNews:<\/strong><\/p>\n Tax tsunami on the way<\/strong> If you want to believe that the lame-duck Congress will come to the rescue after Election Day and renew the Bush-era tax cuts, return the estate tax to its more palatable 2009 levels and increase the exemptions from the alternative-minimum tax, go ahead. Recent history is on our side.<\/p>\n Consider the estate tax. Congress had nine years to figure out what a new estate tax should look like. Instead, it let the estate tax lapse for 2010, something no one expected and few thought made sense \u2014 except those wealthy families such as the Steinbrenners, whose tax bill was reduced substantially when their patriarch passed away this year.<\/p>\n Attorney Joshua S. Rubenstein, national chairman of trusts and estates at Katten Muchin Rosenman LLP, said it was an \u201cincredible irresponsibility\u201d on the part of Congress to let the estate tax expire at the end of 2009. Other billionaires besides George Steinbrenner who passed away include Mary Janet Cargill ($1.7 billion), Dan Duncan ($9 billion), Walter Shorenstein ($1.1 billion), and John Kluge ($6.5 billion.) At the top 45% rate in place last year for estates exceeding $3.5 million, those five families alone would have paid $8.7 billion in estate taxes this year if Congress had not allowed the tax to expire. By doing nothing, Congress will let the estate tax revert to pre-2001 levels, with a top rate of 55% and a $1 million exemption.<\/p>\n Congressional inaction will also affect income tax rates, which would return to where they were before the Economic Growth and Tax Relief Reconciliation Act of 2001 \u2014 15%, 28%, 31%, 36%, and 39.6%.<\/p>\n However, the president may prevail in his proposal to retain the current lower bracket rates of 10%, 15%, 25% and 28% but allow the two top rates of 33% and 35% to go back up to 36% and 39.6%.<\/p>\n There is also the possibility that the Republicans will score victories in the midterm elections this week and successfully extend the Bush-era tax rates for everyone.<\/p>\n Let’s assume that at the very least, upper-income Americans \u2014 defined as individuals with adjusted gross income of $200,000 or more and couples making $250,000 or more \u2014 get socked with higher taxes. What would the effect on those taxpayers be? Assume a married couple with no children, who file a joint return and take the standard deduction. They have $300,000 in wage income, $50,000 in net capital gains and $5,000 in dividend income (for this illustration, no inflation adjustments were made for 2011 from 2010 bracket amounts). Their tax liability will go up $12,929, to $91,789, from $78,860, if the Bush-era tax cuts expire. If Mr. Obama’s proposal is adopted, the couple will see their tax liability rise $5,151 to $84,011.<\/p>\n Another result of the expiration of the Bush-era tax cuts would be a revival of the so-called marriage penalty. Under the 2001 tax bill, the standard deduction for a married couple filing a joint return gradually increased to twice that of an unmarried single filer. If the law is allowed to expire, the $11,400 deduction applicable in 2010 will drop to somewhere between $9,500 and $10,000 in 2011.<\/p>\n Unless Congress takes action before year-end, alternative-minimum-tax exemptions will expire, returning qualifying amounts back to 2001 levels. This has been the first year since 2005 that Congress has failed to enact a patch adjusting these figures, meaning that exemption amounts for 2010 and 2011 will fall to $33,750, from $46,700 for unmarried single filers, and to $45,000, from $70,950, for married couples filing a joint return.<\/p>\n \u201cIt would be a political disaster not to increase even slightly the exemption from the AMT,\u201d said Julian Block, an attorney who conducts continuing-education courses for financial planners and the author of several books on taxes. \u201cThat’s not going to happen,\u201d he said. \u201cWe’ll see a one-year patch, but there won’t be a substantial overhaul. Changing the AMT [by a significant amount] would exponentially increase the deficit.\u201d<\/p>\n In terms of the percentage change, the largest tax hike is the rate on dividends, which \u2014 along with capital gains \u2014 have been taxed at 15% since the Jobs and Growth Tax Relief Reconciliation Act of 2003. A return to pre-Bush tax cut rules means that dividends will be taxed as ordinary income, with rates as high as 39.6% \u2014 close to a 250% increase. While the same fate awaits short-term capital gains \u2014 rates are currently capped at 35% \u2014 rates on long-term capital gains are expected to climb only to 20%.<\/p>\n But even that small increase could affect estate taxes, which this year \u2014 to offset losses from the 2010 suspension \u2014 underwent a change from step-up to carry-over basis. While it would take new legislation to retain the carryover rule to 2011 and beyond, an extension would hit heirs of large estates hard, while burdening executors.<\/p>\n Mr. Rubenstein explains: \u201cCarry-over basis will be very hard to figure out and be subject to income tax. It will be even harder to track then, because income tax returns are audited more rarely than estate tax returns.\u201d Gail Cohen, vice chairman and general trust counsel at Fiduciary Trust Company International, said: \u201cWe could end up with no estate tax in 2010 and a return to step-up in 2011, which many people think might be too good to be true.\u201d He has been trying to identify the worst-case scenario for his clients. \u201cAssuming the cuts are all repealed or repealed for those with incomes above a certain level, it’s not a happy situation. And if the taxes on dividends and capital gains go up, it won’t be happy for anyone,\u201d he said.<\/p>\n \u201cOn the other hand,\u201d he said, \u201cif you look at the finances of the federal government, we need the money.\u201d<\/p>\n Goldman Sachs put out an excellent presentation on the upcoming tax changes…<\/span><\/strong>Goldman highlights how the BIG tax increase will fall on dividends.\u00a0 Here’s Goldman’s sumary:<\/span><\/p>\n In 2011, barring new legislation, the marginal tax rates for taxpayers in the top tax bracket ($373,651 and above) will likely increase. <\/strong>We have identified 10 areas that you may wish to review with your own tax and legal advisors in order that you might prepare for these potential changes:![\"\"](\"https:\/\/www.technologyinvestor.com\/wp-content\/uploads\/2010\/11\/bear-bye-bye.jpg\" "\\"bear-bye-bye\\"")
<\/a><\/p>\n
\nAngry America<\/strong><\/p>\n<\/a><\/p>\n
\nHe gets things done in a very crippled way. The health care plan and the finance plan – he made so many bargains along the way.<\/strong><\/p>\n
\nAs a black man with an odd name, he often had to ingratiate himself in the companies that he kept, and he does. Beyond that, I think he may have a principle of trying to compromise, but that has proved to be a big mistake.<\/strong><\/p>\n
\nI said, “Don’t go into Afghanistan.”<\/strong><\/p>\n
\nHe was very prickly. He said: “I’m not a na\u00efve optimist. I know of the difficulties. They’re all being considered and taken care of.” He really cut off this conversation.<\/strong><\/p>\n
\nHe’s kept a pretty tight little circle around him. By the way, that meeting with us was supposed to be the first of many. There have been none after.<\/strong><\/p>\n
\nAmericans are facing a wave of increases if Congress doesn’t act soon<\/p>\n
\nThe rest of us will get ready for the worst \u2014 a tsunami of tax increases that will make most Americans miserable.<\/p>\n
\n\u201cNobody expected that Congress would never touch the law, and it’s staggering to see what the elimination of the estate tax has done to the economy,\u201d said Mr. Rubenstein. \u201cAt least five billionaires have died this year in the U.S. The revenues Congress lost from their estates \u2014 billions and billions of dollars \u2014 are just huge!\u201d<\/p>\n
\nWith so little time left before the year ends, tax professionals agree it is unlikely Congress will enact any retroactive legislation. Attempting to recoup some of those lost billions in estate taxes, for example, would only generate legal challenges by heirs who can afford the litigation.<\/p>\n
\nMark Luscombe, principal analyst for CCH Inc., a global provider of tax and accounting information to professionals specializing in the field, provided InvestmentNews with this illustration:<\/p>\n
\nShould nothing be done, he estimates that 30 million individuals would become subject to the AMT.<\/p>\n
\nNeither Congress nor President Barack Obama has addressed the basis question.<\/p>\n
\nIt’s that kind of anomaly that concerns certified financial planner Eric Seff of Seff Investments LLC, a fee-based firm that manages up to $30 million in assets.<\/p>\n
\n\u2014Ordinary income rate goes from 35% to 39.6% (a 13.1% increase)
\n\u2014Long-term capital gains rate goes from 15% to 20% (a 33.3% increase)
\n\u2014Qualified dividends rate goes from 15% to 39.6% (a 164% increase).
\n\u2022The tax rule reducing a taxpayer\u2019s itemized deductions by a specified percentage of the amount by which adjusted gross income (AGI) exceeds a threshold does not apply in 2010 but returns in 2011. The limitation occurs on Schedule A, Form 1040.
\n\u2014In 2011, the reduction will equal the lesser of (i) 3% of that excess income or (ii) 80% of the itemized deductions (such as charitable contributions) subject to this rule.
\n\u2014For a taxpayer with $5 million of AGI in 2011, deductions will be reduced by about $144,700.
\n\u2014This rule is often referred to as a \u2015stealth tax\u2016 because reducing deductions by 3% of the excess AGI potentially increases the 2011 marginal tax rate thereon from 39.6% to 40.8%.
\n\u2022The health care reform law enacted this year includes a new 3.8% surtax on investment income (including long-term capital gains) for individuals with AGI in excess of $200,000 and married couples with AGI in excess of $250,000. This surtax begins in 2013.
\n\u2014Surtax increases top marginal rate on investment income other than long-term capital gains (and possibly qualified dividends) to 43.4%.
\n\u2014Surtax increases top long-term capital gains rate to 23.8%.<\/p>\n
\n1) Accelerating the Sale of a Business Interest
\n2) Realizing Capital Gains from Investment Transactions on an Accelerated Basis at Current Tax Rates
\n3) Accelerating Exercise of Nonqualified Stock Options
\n4) Realizing Capital Losses from Investment Transactions on a Deferred Basis
\n5) Charitable Gift Timing
\n6) Making Investments with Reduced Tax Costs
\n7) Converting a Traditional IRA to a Roth IRA
\n8) Managing the Alternative Minimum Tax (AMT)
\n9) Managing State Taxes
\n10) Foreign Investments<\/p>\n