The bipartisan tax agreement announced last week addresses a range of tax issues that have been in question for months. Although there isn’t any legislation yet, I think it is a foregone conclusion that it will be signed into law before the end of the year. Let’s examine a few of the provisions and discuss its impact to investors.
- Individual income: Extends the Bush-era tax rates for two years for all tax payers. This is a move in the right direction but I would have preferred a simplification of the tax code with maybe two or three marginal tax brackets.
- Dividends and capital gains: Extends current rates for two years. This makes investors very bullish. Investors will sell bonds and buy equities and I would expect the market to pop and increase 10 to 15% next year. Maybe more.
- Payroll tax: Employees payroll tax (FICA) cut to 4.2% from 6.2% on the first $106,800 for one year only. This is tantamount to a 2% pay raise. Use it to either pay down debt or increase your 401(k) or 403 (b) retirement contributions. A ROTH investment could be a very good idea.
- Estate and gift tax: Top rate would be 35% with an exemption of $5 million per person for two years. This is too high of an exemption. I would have expected a rate of about $3 million per person.
- Unemployment insurance: Federal benefits extended at their current level for 13 months through the end of 2011. I would like reader feedback on this. On the pro side is that extending benefits help financially strapped families ride out long-term job loss. It provides the greatest benefit to lower and middle-income families who do not have fat severance pay packages. A Zandi study estimates that every $1 spent on extending benefits increases US GDP by $1.73. On the con side is that the money must come from somewhere and will add to the public debt. Some people may not start a serious job search or learn new job skills to make them more employable until benefits are almost exhausted. This will extend the current high unemployment rate.