Unintended Consequences

Unintended Consequences

Prussian Minister Otto von Bismarck once said that laws are like sausages: it’s better not to see them being made. Frankly, that comparison is unfair to sausage makers. When was the last time a kitchen full of lawmakers cooked up something as tasty as a delicate Bavarian weisswürst, or as satisfying as a classic Wisconsin brat, or as fun as a cheddarwurst? But now the new administration has rolled out a grab-bag of tax changes as part of its American Jobs Plan (i.e., infrastructure week) and American Families Plan, and sausagemakers are rolling up their sleeves.

Changing the tax code used to be the sort of Serious Business you’d see in Mr. Smith Goes to Washington. The landmark Tax Reform Act of 1986 was a heroic rewrite of the entire code following five days of sober hearings. A bipartisan coalition of legislative heavyweights like New York’s Jack Kemp and New Jersey’s Bill Bradley led the charge, battling a sea of lobbyists swamping “Gucci Gulch.” The final text passed with majorities in both parties. (Ok, a few years later Dan Rostenkowski, the Ways & Means Chair who finally closed the deal, wound up in jail. But nobody’s perfect.)

Today that sort of cooperation has vanished. (You thought it still works like Schoolhouse Rock? Awww, bless your heart.) Tinkering with the tax code is a grubby, partisan exercise in raw political power. Senate Republicans passed the 2017 tax act with hand-written edits in the margins, language we can only assume started out scrawled on the back of cocktail napkins. (“Hearings? We don’t need no stinkin’ hearings!”) Few of the Senators voting on the $1.4 trillion bill had even seen the 479-page text before voting.

Now the circus is back in town. The White House has proposed raising the corporate rate back up to 28%, halfway between where it stood in 2017 and where it stands now. But rank-and-file Democrats, who seem happier closing loopholes than raising rates, look more inclined to settle on 25%. The administration has proposed hiking the capital gains rate on incomes over $1 million to 39.6%. That proposal drew fire faster than the first guy off the boat at Omaha Beach, and we’ll probably wind up around 25% there, too.

Writing tax law is a wonderfully sadomasochistic interplay between pain and pleasure, between the bite of increases in one place and the sweet relief of cuts in another. Should estate taxes go back up? Will “coastal elites” get their unlimited state tax deductions back again? Come to think of it, the whole process might not be that different from deciding how much actual “meat” to stuff into those sausage casings, along with the “filler” and other icky stuff.

Whatever recipe they pick, lawmakers should consider how their plans might go wrong. In 1993, President Clinton thought it was unfair that corporate CEOs were making 60 times more than rank-and-file workers. So he added Code Section 162(m), which limits deductions for executive pay to “just” $1 million — except performance-based rewards like stock options and grants. Compensation committees laughed and restructured pay packages to meet the new rules. The result? For 2020, the average CEO took home over 300 times as much as the average employee.

We may not know until December what the tax system is going to look like in January. But our job won’t change no matter where it goes: map a course for your finances to avoid any new red lights where you have to stop and pay, and take advantage of green lights where you can go without paying. Either way, you’ll be way ahead of the people who settle for just recording their history under the new rules!

Contact us to find out what green lights you can turn on, 561-655-5777.

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