Tax policy clarity would give economy a boost

Planning is essential to good business management, but lately it has become very difficult for most business owners to plan out very far.  I am convinced the inability to plan is preventing many small business owners from expanding. Economic, political and market conditions now are so volatile, no one knows what to expect. Caution is a natural reaction to uncertainty. Too much caution is a sure recipe for recession.

Business owners don’t expect to be able to predict the future but they do expect, for example, to know what their next tax bill is going to look like. The uncertain tax environment, complicated further by unanswered questions surround health insurance, makes it very difficult for business owners to plan out more than a few months. As the tax extenders in the 2010 Tax Relief Act run their course, no one knows what to expect after 2012. Will Congress really allow all income tax rates to go up, the payroll tax to increase and the estate tax to skyrocket? With government completely frozen, business owners can’t be blamed for hunkering down until something thaws on the fiscal and tax landscape.

Taxpayers face a much more serious situation now than we did two years ago. In 2010, Congress and the president agreed to extend so-called Bush-era tax cuts for two more years. But this time around, it won’t be so simple. The Budget Control Act of 2011 mandates federal spending cuts of some $109 billion per year, starting in 2013. The Congressional Budget Office scores the cost of the Bush tax cuts at about $180 billion per year, so it seems less likely they will be extended beyond 2012. Congress built “sequestering” into the Budget Control Act, which means automatic cuts will take place if Congress fails to identify cuts on its own.

Conventional wisdom has it that Congress will accomplish little between now and the elections. Regardless of which party prevails on Nov. 6, the lame duck session in November and December could be a free-for-all. If Congress does do something on tax policy for 2013 and beyond, it is likely to happen during this session. The upshot for now, of course, is that no one knows how to conduct their tax planning for next year.

Small business owners have real issues to consider. For example, with the individual income tax rates set to rise, subchapter S corporation owners might want to consider converting to C corp status. It’s possible the corporate rate will end up being lower than the new personal rate. Another issue: with the capital gains rate set to go to 20 percent from the current 15 percent, some business owners considering the sale of significant assets might decide to move the timing up to this year to reduce their tax liability on any gain.

Business owners succeed by making such decisions intelligently. Setting aside questions about whether we are taxed too much or too little, it seems at a minimum that Congress should be able to tell us a year in advance what our tax obligation is likely to be. The economy will continue to sputter until we get some clarity out of Washington.

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