Grover Norquist & the great Bush tax cut debate!

A client recently sent me this e-mail from a friend “who is very smart” and wanted to know what I thought. It turns out this little diatribe is from Grover Norquist (http://www.atr.org/) who was George W. Bush’s main tax advisor (need we say more). When I was in northern Maine on vacation last week I read an op-ed piece is a little newspaper there that taken almost verbatim from this piece. See my comments after each section;

In less than six months, the largest tax hikes in the history of America will take effect. They will hit families and small businesses in three great waves on January 1, 2011:

First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families.
These will all expire on January 1, 2011:
Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

RESPONSE - The current administration has always maintained that these bracket changes would not affect those making under $250K so therefore would be little or no change to the 10, 15, 25 or 28% brackets. So the change is mostly just to the 33% & 35% brackets. Keep in mind that these “tax increases” were in fact enacted by the Republican congress and President Bush when they had them sunset on 12/31/2010. Lastly, there is starting to be a lot of pushback regarding these changes, I would not put too much money on anything happening necessarily this year.

Higher taxes on marriage and family. The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut.

RESPONSE - The marriage penalty is (essentially) a mathematical trick of the code (not a secret plot by evil tax code writers or congress) would most likely be fixed as it has in the past - I doubt that the MP is something anybody really wants. Personally I think the dependent care and adoption credits probably should be ameliorated in some ways to broaden the tax base a bit more.


The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

RESPONSE – We will agree as adults here to NOT use the infantile “republican-speak” term “death tax” and use the proper terminology ESTATE TAX instead. The estate tax was allowed to lapse (as the Bush administration planned) this year, something I doubt is anybody expected to actually happen. In all likelihood it will be pegged at somewhere between 3 and 5 million and as such would (statistically) affect only a handful of American taxpayers. There has been 0 discussion regarding it going back to the levels mentioned above.

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in

2011. These rates will rise another 3.8 percent in 2013

RESPONSE - This refers to the Bush lower rate on dividend income and LT cap gains - I suspect this will happen and I truly doubt if ANYBODY reasonable expected these preferential rates to last for very long. My vote would certainly be to keep the LT cap gains rate @ 15% and increase the dividend rate. The other thing I would add here is that one of the tricks of these particular Bush tax cuts is that the alternative minimum tax (AMT) often added back some of the tax savings delivered by these 2 cuts with higher AMT taxes.

Second Wave: Obamacare
There is over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:
The "Medicine Cabinet Tax" Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).
The "Special Needs Kids Tax" This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education.
The HSA Withdrawal Tax Hike. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HAS from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

RESPONSE - These are all true (to the best of my knowledge – I don’t think there are any “experts” yet on the new health care legislation as many of the details have not been worked out yet)


Third Wave: The Alternative Minimum Tax and Employer Tax Hike
When Americans prepare to file their tax returns in January of 2011, they'll be in for a nasty surprise-the AMT won't be held harmless, and many tax relief provisions will have expired. The major items include:
The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress' failure to index the AMT will lead to an explosion of AMT taxpaying families-rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.

RESPONSE - AMT has been ensnaring folks consistently for the last 8 years, this INDEED was a technique of the Bush administration tax code to ameliorate the effect of some of the Bush tax cuts, for instance very few investors really got the 15% dividend and cap gains rates after the AMT was calculated on their return.

Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or "depreciate") equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be "depreciated."

RESPONSE - It is very unlikely this will happen, NO Democrat or Republican is going to have the stomach to attack this classic small business tax break.

Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. Then biggest is the loss of the "research and experimentation tax credit," but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

RESPONSE - It is very unlikely this will happen – many of these credits are historically re-authorized year by year by congress and are always re-authorized

Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

RESPONSE – These are fairly small items in tax terms and I am sure they will effect some folks negatively but in the scheme of things do not seem to be something to get worked up over.

Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual "required minimum distribution." This ability will no longer be there.

RESPONSE - Only seen this once in my career, largely meaningless in my opinion

Final comments - this is typical sort of "red meat" rant, ignoring all fact patterns and current tax trends, as I said it is from a website run by Grover Norquist, the notorious tax/economic adviser in the Bush administration. Folks like Norquist have NEVER met a tax increase that they like, or a tax decrease that they don’t like - no matter how preferential or biased it is to one group or another or unsupported by any meaningful economic data!


Seems to me that during his little rant he should take responsibility for helping pass tax cuts during wartime (Iraq) that were clearly unsustainable AND then having them sunset on a specific date! This type of writing is meant to spread fear and hatred of the current administration & the Democrats. I have no problem attacking the current administration and the Democrats on policy, but this sort of unfocused and uninformed anger is not going to lead to any meaningful change in our political system, and that is really sad.

A superb website to see the effects of proposed income changes on your personal tax return is http://www.mytaxburden.org/ run by the Tax Foundation