Ryan budget calls for two tax brackets

Advisers like the direction of the House tax reform plan but doubt it will result in real change

Mar 25, 2012 @ 12:01 am

By Mark Schoeff Jr.

A budget plan poised for House approval this week includes tax reforms that many investment advisers embrace — even as they doubt that Congress can make it happen.

Last week, Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, introduced a budget resolution that calls for deep cuts in domestic spending, an overhaul of entitlement programs and a balanced budget by 2040.

The proposal also contains fundamental tax changes, including collapsing the current six tax brackets to two — 10% and 25% — and eliminating the alternative minimum tax. It doesn't address capital gains and dividend rates specifically but implies that the current 15% rate for both should continue.

The tax plan, which was drafted by House Ways and Means Committee Republicans, wouldn't decrease the amount of taxes that the government collected, as special tax breaks would be scuttled.

“The budget would eliminate tax subsidies, not for the purpose of increasing total tax revenue, but instead to lower rates,” according to the budget document.

Thomas Moore, principal at Wela Strategies LLC, likes the idea of streamlining the tax code and jettisoning special tax treatment.

It would help ensure that high- and low-income earners pay up, he said.

“Both ends of the spectrum need to be dealt with,” Mr. Moore said. “The plan simplifies things and gets rid of the deductions and tax credits.”

David John Marotta, president of Marotta Wealth Management, also endorses the House tax reform proposal.

"RIGHT STEPS'

“Those are all the right steps toward increasing economic freedom in the United States, and probably boosting productivity,” he said.

The House budget resolution is designed as a blueprint to guide other committees, which will fill in the details. For instance, the Ways and Means Committee would determine the income levels at which the 10% and 25% rates kicked in and which tax breaks were ended.

Mr. Ryan acknowledges, however, what advisers and their clients already know: A House budget won't become law this year, given that Democrats control the Senate.

“Over the last 12 to 18 months, in the majority of our meetings with clients, one of the major issues that has come up is that they're so frustrated with Congress and the political process — much more so than with the stock market and bond market,” said Ed Kohlhepp, president of Kohlhepp Investment Advisors Ltd. “They don't think Congress can accomplish anything anymore.”

Walter Primoff, director of the professional adviser group at Altfest Personal Wealth Management, re- members a time when Republican and Democratic congressional leaders would travel home together if they represented neighboring districts.

That era is over.

“You can't get these people to have cups of coffee together anymore,” Mr. Primoff said.

One of the goals of the budget resolution is to provide what Mr. Ryan calls a clear alternative to President Barack Obama's budget in the months leading up to the November elections.

Mr. Obama's plan, which was released in February, would allow the top two tax brackets to revert to 36% and 39.6%. It also would increase the capital gains rate to 20%, from 15%, for individuals earning more $200,000 annually, while taxing dividends as ordinary income rather than at the current 15%.

GIVEAWAYS AND BREAKS

Mr. Ryan's budget “would shower the wealthiest few Americans with an average tax cut of at least $150,000, while preserving taxpayer giveaways to oil companies and breaks for Wall Street hedge fund managers,” White House communications director Dan Pfeiffer said in a statement.

Mr. Ryan said that he can compromise, but not with Mr. Obama, who he said stands against the bipartisan trend to make the tax code simpler and broader.

“I believe that the seeds for bipartisan compromise on Medicare and tax reform are there, but it's not with the Democrats that run the party right now,” Mr. Ryan said last week at The Heritage Foundation in Washington.

“It's not with [Senate Majority Leader] Harry Reid [D-Nev.], and it's not with President Obama. That's why I want to go to the country and ask [voters] to replace them,” Mr. Ryan said.

House action on the Ryan budget isn't simply pro forma, according to one Capitol Hill veteran. It could set the stage for further tax reform development, even though it is almost certain that Congress will wait until after the election to address the Bush administration tax cuts that expire Dec. 31.

The House vote “will be a clear statement of where Republicans are in terms of tax reform and taxes on capital investment,” said Jim Mc- Crery, a former Republican member of the House Ways and Means Committee, who now heads the Alliance for Savings and Investment.

MYRIAD DEDUCTIONS

“And we know there are a number of Democrats who have historically supported lower rates on capital gains and dividends,” Mr. McCrery said. “That combination is meaningful.”

There is also the challenge of choosing which of the myriad tax deductions to cut. Favorable tax treatment of retirement savings and life insurance has fierce advocates.

“In theory, it's a great idea,” Diahann Lassus, co-founder of Lassus Wherley & Associates PC, said in reference to Mr. Ryan's plan.

“In implementation, there are going to be some major issues around it. I take most of these proposals with a grain of salt,” Ms. Lassus said.

For now, tax policy is in limbo.

“As the year gets further on, people will have to try to make decisions about what the law will be in 2013,” Mr. Primoff said. “Right now, nobody can guess.”

mschoeff@investmentnews.com

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