Focus 580; The Tax Cut Package

Good morning and welcome to focus 580. This is our telephone talk program my name is David Enge. We're glad to have you listening this morning. Just a week ago President Bush signed a new major tax cut package in the amount of at least on the face of it the amount is one point thirty five trillion dollars. This was something that he had certainly talked about a great deal in the campaign and although perhaps the president did get the size of the tax cut that he wanted. It did allow him to keep a major campaign promise and certainly so far it's been his biggest legislative victory. However there is a great deal about this tax cut that is uncertain as we will discuss here in this part of focus 580 because one of the provisions of the law is that in the not too distant future if it's not renewed things go back to the way that they were before. Also already in Washington some members of Congress are talking about making changes. But what we're trying to do this morning at least is to talk about the package as it is and what it means for

various kinds of people in this country. And our guest of the program is Richard Kaplan he's professor of law at the University of Illinois. He's particularly interested in elder law and has discussed with us before on this program Social Security and what's happening with that and we talked about that more than once and no doubt in the future we will talk about it again. But this morning we're going to concentrate on this tax cut package and as we talk of course questions are certainly welcome. If you're here in Champaign-Urbana where we are 3 3 3 9 4 5 5 is the number to call. And if it would be a long distance call. We have a toll free line you can use and we'll pay for the call that's 800 to 2 2 9 4 5 5 3 3 3 wy L.L. and toll free 800 1:58 W while. Well thanks very much for being with us once again. Thank you David. And just again to make the point of beginning it as if I think if people have been following the coverage of this they will be aware of this but if not to make the point

again sort of two things One is that the provisions of this law take effect gradually over a period of time. So it will take a number of years before this completely everything in this goes into effect. And. The last day of December of the year 20 10. If this is not renewed by the Congress. Everything goes back to the way it was before the old tax rates. The estate tax one day it will be gone the next day it'll be back. Unless of course they make that change. So there there seems to be some uncertainty about whether in fact all of the provisions of this will actually go into effect. And then if they do will they stay. You're quite correct. There's no doubt that the past two decades have seen a lot of tax law instability. What this package does is guarantee that that instability will continue and in fact in many cases there are provisions

of the law that will not even occur while President Bush is president. That is many of these do not occur until the year 2009 2010 so that even if he is re-elected he will not be president then we will have two presidential elections before many of these provisions take effect and we will have no fewer than five congressional elections. It is extremely unlikely that during that period when personnel is changing in the House and Senate that everyone who is elected to office will feel that tax law is off the table. But all the decisions have been made that they cannot change tinker or re prioritize. And this law very slickly guarantees that certain provisions of the tax law will be on the agenda because they are going to expire unless they are renewed. It seems on the one hand it seems unlikely that the Congress would simply let things snap back to the way that they were. But having said that then

one doesn't really know what they will do. You're exactly right in fact in if they did nothing in the year 2011 we would have the single largest tax increase in our history not just the estate tax that you mentioned but all the tax rates would go in one dramatic year back up. Here they had been phased down over a fairly long trajectory and here within literally one day they would snap back to the year 2000 not even the year 2001 but the year 2000 rates. Other provisions such as a deduction for college tuition actually expire along the way. So you have more than just the year 2010 sunset to worry about there are provisions that will expire halfway through this period and then there are other provisions particularly relating to marriage tax penalty relief that do not begin until 2006. So there are several elements of instability. One is this sunset provision 2010 where the whole

package disappears. The other is the variety of provisions that do not take effect until three four five or even eight years in the future. And it's very easy to simply defer those initial starting dates and postpone the revenue loss. Well I want to talk in some detail about some of the provisions and let's start by talking about tax rates. What this bill does is it creates a new tax bracket on the bottom for the the least the people with the least money. And then for everybody else it lowers the brackets so that the top rate. Which is no. 30. Thirty nine point six percent will go down to thirty five and so on and so forth each. Each one is going to come down to a couple of you know the math is mind boggling the thirty nine point six percent rate affects less than 1 percent of the population. But you're

quite right it's going down to 35 percent. But that's not for another nine years. Interestingly enough President Bush had campaigned on the idea that he wanted to make the current five rate structure simpler by going to four rates by the introduction of this 10 percent rate for low income people that you mentioned it's actually going from five rates to six. That is not as significant however is the fact that the rate that applies to 71 percent of Americans namely the 15 percent tax rate is not being lowered. So one of the fallacies of this rate is that all tax rates are declining. Actually the rate that applies to most Americans the 15 percent rate is not scheduled for any reduction throughout this period. It's only the rates above 15 percent that are being gradually reduced. So there was a lot of before when this was all in the works there was a lot of discussion about who benefits. And whether indeed it benefits people on the

upper income levels more than people on the bottom setting that question aside for a moment. Is it is it the case or is it not the case that everyone will see some reduction in their taxes. Everyone will see some reduction in their taxes eventually even that 10 percent rate for example doesn't apply to children or other dependents. For this year they'll begin to see some relief next year but the biggest impact of these rate reductions is going to be at the upper end both because there is more income involved and because the rate reductions are greater for calendar year 2001 the rates that are going down are basically by half a percent. That's almost imperceptible. And I think that's actually the rationale for these famous refund checks that are going to come out in September or earlier of $300 per single individual $600 for married folks. I think the Congress correctly perceived that the

tax rate reduction for most people was going to be so small that they wouldn't actually see it. Even if the withholding tables were adjusted immediately and so that's why they wanted this little lump sum. Some would say it's a gimmick for them to see the rate reduction. In fact that whole check mechanism is actually not a refund of prior years taxes. It's an advance lowering of this coming year's taxes. So the point was that you would have gotten this benefit in April of 2002 anyway but the fear was that most Americans who either use computer software preparation programs or outside preparation services would not realize that their taxes had really gone down. And so that's why a separate check was being sent so as to make it obvious. But the point is that everyone is getting the benefit other than dependents and certain other ineligible individuals everyone's getting the benefit of that reduction on the first 6000 and 12000 and add what

we should expect is that this is a one time special offer. This was not likely to happen again probably not on the other hand starting in the year 2002. Everyone will get the benefit of that rate reduction because that 10 percent bracket will then be put into the rate structure. Our guest in this hour of focus 580 Richard Kaplan he's a professor of law at the University of Illinois. We're talking about the tax cut package that was just signed into law by President Bush just about a week ago. And what exactly is in it. Queer questions are welcome and we have somebody here ready to go and we get some others and we're working as many people as we can. 3 3 3 W I L L toll free 800 1:58 W while those are the numbers. Let's go talk with a caller here in Belgium. Lie Number Four and yes there's a real basic point about this discussion and I don't think I understand I'm maybe I'm the only person in the world it doesn't. You say that there's going to be a one point

three. Trillion dollar reduction of our taxes right through now is debt the amount of taxes that's going to be reduced from what we pay now or from what we will be paying them in the years. You know the revenue loss numbers are very very shall we say fanciful. It's pretty based on the idea that if the Congress did nothing they would collect one point three five trillion more. Then if this law went into effect that 1.3 5 trillion itself is so wishy washy compared to all the attention that was paid to it because it's not a lump sum It comes in a certain amount over the next 10 years and it's based upon a whole variety of assumptions of economic growth employment immigration. The price of energy all kinds of things which are not really very knowable even six months in advance and the

magnitude of error between what's really going on and what's assumed gets larger the further you go out. But this is the way the game is played. And these are the revenue rules that supposedly discipline Congress to. Otherwise they would just give away the complete store but they have to at least come up with some estimate of how much revenue they will not be collecting because of these reductions compared to if they had done nothing. So then if I understood your discussion the understanding that if at the end of 10 years where 1.3 trillion dollars less if you average that per year you provided you get about one million one hundred fifty billion dollars right. That's correct. But it doesn't you divide that by the number of people. Nobody really gets very much depressed. Well that's true. Actually it's less than your analysis would suggest because it doesn't come in even 10 year or

even annual increment because the revenue comes on stream later in the period so that the first couple years we're talking about 30 billion maybe 60 billion. I'm reminded of the comment that former Illinois Senator Everett Dirksen once said about a billion here a billion and there pretty soon you're talking about real money and a billion dollars is certainly a great deal but in this context that's sort of the currency of the realm. But it is very much back loaded. The estate tax provision in particular really loses very little revenue for the first six or seven years. And then there is a gigantic revenue decrease in that final year so if you were to graph the 1.3 5 trillion the first three to four years is relatively small 25 to 50 billion and when you divide it by the number of people you're quite correct the amount is not a great deal. Further it's not allocated according to the number of people it's allocated according to tax burden.

And since the. Top half of American taxpayers actually pay something like 96 percent of all income taxes. They are going to get most of that reduction. And so a much smaller group of Americans will benefit something like 35 percent of Americans don't pay any income tax whatsoever as so they are automatically excluded that's not to say they don't pay any taxes many times they pay a great deal in Social Security taxes and payroll taxes for Medicare in fact nearly three quarters of all Americans actually pay more in Social Security taxes than they do in income taxes. This tax package however says absolutely nothing about those payroll taxes. Its focus is exclusively on income taxes and so therefore the people who pay the bulk of the income taxes would be receiving the bulk of the tax reductions. The enlargement thank you just again to go back to that to the point that had been made by many people beforehand that this was primarily these changes primarily benefit wealthier

Americans if you will. If you set aside for a moment the elimination of the estate tax which is for some some people is going to be quite significant and you look simply at income tax does this does this really benefit disproportionately does it benefit higher income individuals. I don't see how anyone can contend otherwise. The fact of the matter is that the upper half of Americans who pay income taxes at all remember here we've already cut out about a third who owe no income taxes simply because their income isn't high enough. The upper half provides 96 percent of all revenue Annancy of all income tax revenue and it's even more skewed when you then get up to further percentages so that for example the top 10 percent are paid nearly 55 percent of all income taxes. Now we could balance that by pointing out that they actually have

approximately that amount of the total national income so that their tax burden is proportional to their income but income in this country is very disproportionately. Concentrated at the upper end and therefore the taxes are and accordingly the tax reductions will be the people at the from about the midpoint on down pay the bulk of the Social Security taxes. And if we are to provide Social Security tax relief they would get the bulk of that relief but this bill was specifically designed to focus on income taxes and not to provide any reduction of Social Security tax relief. The inevitable result of that is that if we're going to focus on the one tax that is paid disproportionately by upper income individuals namely the income tax then they any tax reduction that applies to that revenue stream will benefit those people disproportionately.

Let's continue. We have somebody on a car phone so I want to go to them line one. Hello. Yes yes go ahead. My question is if. The text would go down against the national debt. Will it not. It's a four or five on it. Been to the national treasury and therefore I would call it a one point twenty five we should call the one point eighty five whatever the number is. You're absolutely right. In fact part of the whole revenue estimation of this tax cut has several elements of fantasy I mentioned the various assumptions already. Your question points out another level of fantasy namely that what they look at is simply the revenue that would not be collected. Another approach would have been to calculate what if you would calculate use the revenue to pay down the debt. Not only would you have that additional revenue but you would have paid off the debt and saved the future interest cost. Now most of that interest savings would be

after the 10 year period but it would definitely redound to the benefit of American taxpayers in the future. That was in fact a major debate by a number of people who oppose this large a tax cut. Their contention was that the entire amount should be devoted to tax reduction but at least some significant portion should be devoted to tax to debt reduction. It's kind of amazing that when we're dealing with numbers that could easily easily be splits that is allocate one sum for tax relief and another some perhaps smaller for a debt payment that none of it was basically allocated for debt repayment which would have had the benefit down the road of not only reducing the interest costs of the government but also reducing interest costs of all other American borrowers whether there are home buyers car buyers etc. because that amount of credit would not be soaked up by the federal government a great many people in fact the policy the

prior administration was to do just that namely to keep the tax system as it was and simply any apply any surplus to paying down the debt. That was an issue that was discussed and the people who wanted to pay down the debt basically lost in the effort. The question is if there are. I do any checks and balances in the new tax code that will provide Congress or the president to reverse the trend. If some of the options are not materializing. Yeah it's an interesting question there was a movement by some in the Senate the so-called moderates to put in automatic triggers. That is that if certain budget forecasts were not met that future rate reductions would not go into effect without anyone having to vote on that did not get passed. The view the administration was they didn't want that kind of instability so an automatic

check was proposed but rejected on the other hand Congress meets. And this is simply legislation it is not a constitution and therefore it requires only 51 percent of the votes in each house and a willing president. To reverse forestall defer or repeal any part of it the package is made up of four hundred forty one separate changes to the Internal Revenue code so they don't have to repeal the entire act. They can actually go through prioritize pick and choose select which provisions they want to do for still further which ones they want to simply eliminate. And they can do this for any reason they can do it because the economic forecasts are proving inaccurate they can do it now because the economy is overheating. They can do it because they want to add a prescription drug benefit or expand military spending. They can do it for any reason so as long as Congress is meeting and they can always change any of these provisions none of

them are cast in stone but they will have to do something affirmative. That is the effort for there to be an automatic trigger was proposed and defeated. Thank you very much. Thanks for the call just I'm afraid people are going to get real snow down in the numbers here but I guess one just maybe one point. Final point to make on this question of if you think about it this way what's the price tag on this tax package that us different people you're going to get different answers. But it seems to me the long and the short of of it is if you ask that question is the price tag of this actually 1.3 trillion dollars. There are a lot of people who would say to you Well actually no it's more than that. If you ask how much will how much less money will the government have as a result of this law. It is probably more than one point three five trillion dollars. There's a lot of evidence to that effect. There is a countervailing theory that actually the cost is less because it will so stimulate the

economy and get people working more that they will be have more incentive to save invest work longer hours and so forth that they will be paying more taxes on their increased income. That of course was the supply side notion of the Reagan revolution and to some extent it was validated and to some extent it wasn't. The American economy is a very dynamic beast and it's very hard to estimate very far in advance what will happen when you make a single tax change when you have a whole slew of nearly 400 tax changes. Then the interaction of these variables and the general economic conditions is impossible to predict. For example somewhere there's a whole notion in economic theory that says if tax rates are going down people work less because they will have the same after tax income and with less effort which would reduce it which would make the taxes tax revenue even smaller than is projected or to put it in the way that you did

namely the tax cost of this legislation would be much higher than 1.3 5 without even getting into the possibility of what you could have done with their money paying off the debt and saving the interest which would have jacked it up still further. We're already at the midpoint here we got some other callers will keep talking with folks and I'd just like introduce again the guest where this our focus. We're speaking with Richard Kaplan he's a professor of law at the University of Illinois law school and has been with us before to talk about other sorts of things we've talked a couple of times with him about Social Security. And here now this morning we're talking about this federal tax cut package that was just signed by the president last week. Questions are welcome. 3 3 3 W I L L toll free 800 1:58 WY. The next caller is in Urbana line number two. Hello good morning. Yes I was a little confused about the this tax refund the sprockets pre the year tax refund and I was wondering how much one had to actually bear in the past year to qualify for that.

It's a super question because this is one of those typical paradoxes of tax law it seems very simple and most people get $300 per person. So a married couple would get 600 but it becomes much more complicated because it's calculated on the basis of people's 2000 income that is the income that they showed on their 2000 return. So if they showed less than $6000 they're not going to get the whole $300 it's basically 5 percent of their tax in. The year 2000 on the first $6000 of income married folk it would be the first 12000 if their income in the year 2000 however was less than that amount they will get some smaller number. And what makes it even more confusing is if since this is not a refund of the year 2000 taxes but an advance on the year 2001. If their income fluctuates to the point where their income is significantly higher or lower in the year 2001 they will

actually have to reconcile the checked with their tax liability in a special worksheet that has yet to be derived but will be part of our welcoming package that we get after the first of the year. But it's basically the first $6000 of income for a single person twelve thousand for an for a married couple with the further proviso that if we're talking about people who are claimed as dependents they are ineligible for this taxable year entirely. Right well thank you very much. Thank you. Let's go next to another urban a personal line 3. Hello. Hello. Yes. Oh I'm from or Oh my apologies well. Well go ahead. I'm apologizing to back. I have three things to say. A In your estimation would there have been a better way to give a tax cut. I I the way I see it there's so much paperwork that has to be done. It would seem to me if you just.

Lowered the tax rate instead of doing all the paperwork that's going to cost so much money and have so many problems that that would. That was my thought on it ended. Why do you think this is a good way of doing it. And I the other thing that came to my mind was do you think this is really an honest to goodness tax break or is there an ulterior motive behind it. And I'll hang up and let you talk. Thank you for the question the first part in terms of the better way this is obviously a very subjective question in terms of the paperwork you're absolutely right. This is a complicated way of doing so for what it's worth President Bush proposed a very simple approach of simply reducing the tax rates. He did not have this special 10 percent bracket in there he did not have this advance refund check that was not part of the Bush proposal. The

Bush proposal was simply to lower the current five rates to collapse them into four and to lower them over a period of time it was a fairly simple and straightforward approach. The president proposes Congress disposes as the old line. This is democracy. The president can come up with whatever ideas he or she wants but the Constitution allocates primary responsibility for tax legislation to the Congress and therefore they even if they are in agreement they may have some different ideas. The House of Representatives under a very strict party control passed a bill that was a little more complicated than what President Bush had proposed but was still relatively clean it did include the special 10 percent rate in response to the concern that if you just went with a rate reduction across the board that the benefits were going to be so disproportionately allocated to the upper income people. And so they felt they needed to provide something

tangible to the lower end. As is always the case with tax legislation there are conflicting objectives. President Bush has a proposal basically didn't care how the chips fell he wanted to simply provide a tax rate reduction. The people in the House of Representatives however wanted to provide a little more tax relief for people at the bottom of the scale in response to criticism. Still further then they realize that these rate reductions wouldn't take effect till next year and would not show up on people's tax return until they did until in April 2003 which was after the next congressional election so that entered a political imperative tax laws never just about economics and certainly not about Paperwork Reduction. And so the political imperative is we need to the Congress. We need to provide a tax cut that people can see and see before they go to the polls in 2002 so that's what spawned this whole idea of a refund check which is the first time this has ever been done. Probably won't be

done again. It's costing actually some eighty seven million dollars for the IRS to process all of these checks which they would otherwise not be sending. So this is an additional cost that it was incurred simply for the political reason of making sure people get it. In terms of the broader approach your question raises a fantastic issue about what does this say about tax and provocation. And if anybody had any hopes for tax simplification and some of us still dream of that this is a tremendous slap in the face as I say 441 new tax code changes are put in. And what makes this particularly ironic is that the Congressional Committee on Taxation came up with a comprehensive study on what makes the tax code complex just this past April and provided 230 specific recommendations of making things simpler. The current tax package adopted three out of those 230 recommendations and even then they did so for the purpose of reducing

rates on particular constituencies not for the purpose of simplifying things. When push came to shove they were opted for tax reduction rather than simplification. So simplification is dead the flat rate idea is dead because what this showed is that when you have a fairly conservative anti-government proposal on the table when one when it really gets through Congress it gets much more complicated. The Senate of course which I have mentioned and not mentioned Up till now is a very independent body and they have their own set of priorities. And they were not as keen on the whole idea of across the board tax cuts and because of the closely divided part of the Senate between Republicans and Democrats. Each senator was an important vote. Many of the senators thought it was much more important to stimulate retirement savings and thought that those kind of targeted tax

benefits to get encourage people to put more into IRA. And for one case and that sort of thing was a higher priority than rate reduction. Another group of senators thought that the middle class particularly those saving for their kid's college education were the ones who needed relief more than just these tax rate reductions and therefore they wanted to see targeted relief for various means of saving for college education costs. As a result you had these conflicting pressures and in order to get the votes of the people who had a higher or different priorities it was necessary to throw in these additional provisions relating to education relating to retirement relating to child credits relating to marriage tax penalty relief in order to get enough people to vote for the bill. Unfortunately it has been the pattern not just with this Congress but literally for the past 40 50 years there when Congress is faced with a choice of A or

B. It typically picks a plus b and half of C so that they can accommodate as many interests as possible. The result is that you get a bill that every day that you get enough votes for. But it does mean that the goal of tax simplification just completely is lost in the shuffle just and real quick too and I have other calls I promise I'll get to them but to also to say something about the other point the caller raised I think that is correct that part of the reason that some conservatives particularly those who think that they want to limit the size of government those folks are celebrating this is a victory is not because it puts money in people's pockets or that it may stimulate the economy which it may or may not do. They're happy because essentially it means that there's no money for any new spending. This is the so-called addict approach. That is that Congress is addicted to spending and that if the money is on the table they will spend it. There

is a fair amount of empirical evidence that this is a valid concern whether the Congress is dominated by Republicans and Republicans or Democrats. They may have different spending priorities. But the point is that they all have particular projects that they think ought to be funded and in many cases they think are a higher priority for the nation as a whole than simply tax relief. And so the concern was if the money is there it will be spent either on programs that they disapprove or just that this will provide more government services and so for those who want to you might say wean the American populace from government. They wanted to starve the national government from additional funds to do any sort of objective. The concern of these people said and there is some proof from prior years is that if you try to aim for a surplus that will be used to pay down the debt. The fact of matter is that Congress has some kind of uncontrolled should Radek will have

to go in and spend it because they won't be able to keep their hands off of it. And so that this in and. Final point we get to the girls this goes back to the preps in a way goes back to this question about do we think with the likelihood that Congress may come along and change this. If Nell as a result of this because you've taken all this money off the table if someone comes along and they have they decide they want to fund a new program whether that be or for example missile defense or say prescription drugs for seniors there's no money for that. So if they decide they want to do that they're going to have to figure out they're going have to find the money someplace. There will be sort of two threads here. One they will have to find the money by deferring or eliminating some of these tax provisions or they will have to simply say we'd like to do this particular benefit not this year because the money has been taken will take this up in a few years. So yeah that was in an evident

and inevitable consequence and a foreseeable one. And this is and that was why it was opposed by not just the so-called liberals I suppose who are in favor of a prescription drug benefit but Senator McCain who is very concerned about rejuvenating the military establishment and was concerned that this was not going to leave enough funds available for that sort of expansion and so he opposed the tax bill for that reason. You know back to the phones here. Next is champagne line one. Hello. Thank you. Yeah back to how they figure all this stuff to make projections and referring back to another guest you had on a number of times Mark Weiss brought in as pointed out that the projections they use for Sosa security are unrealistically bleak. Basically projecting a depression economy for the next 30 years or so. And you know I just wonder you know it would. And it seems to

me that they can they're probably not using the same calculations to figure so security that they're using to project this surplus. You're quite correct the two. Sets of projections are done by entirely separate parts of the government and they look at some of the same variables but they try to aim at different degrees of conservatism for example so security makes no bones about the idea that they really have no idea what the rate of immigration of workforce participation by women by the number of births and so forth. When you go out more than two or three years and so they actually come up with no fewer than three sets of projection an optimistic or pessimistic and one that simply is the arithmetic mean when it comes to these income tax projections they look at a whole larger set of variables and they try to come up with a so-called best estimate not necessarily pro or con but there

is no effort to reconcile the two so that in any given year Social Security may be showing one set of economic conditions. Typically a fairly bleak one. And yet on the income tax side the notion is that these tax rates will produce heaven on earth and therefore the economy will be booming and a rational purpose person could quite accurately say do you characters ever talk to each other and the short answer is No. And they didn't never share data and they're not even trying to come up with similar benefits so you're right it's a curious anomaly that across the street from the Capitol the Social Security to the administration is wailing and gnashing their teeth about how bleak things look for a while. When it comes to spending revenue that hasn't been even obtained yet we think things are looking pretty darn rosy. Sorry my Spin of the movie Dave where Kevin Kline is personating the president brings in his friend his accountant looking over the budget.

You know accounting just can't believe that you could run you know anything this way. Remember the movie and Charles Grodin. I think playing McCown said something about if you ran his business this way he would be outlawed. That's right but who makes the rules the government does. That movie was unfortunately described as fiction. I. It seems to me and I'm not a big fan of this this tax cut but it seems to me I'd be a lot fairer to me and certainly people who have the least ability to survive in this economy if instead they had you know maybe lessen the burden on the Social Security in peril taxes and offset that by making people continue to pay above the current cut offs raising that sum. I mean you know this is really skewed in any way you look at it towards the people who live well in my estimation anyway. Police need it.

There's a lot of sentiment corresponding to what you say. And that was briefly discussed at the beginning of the debate that is Should some of this go to offset Social Security. Or to raise to lower that burden. And you may remember some of the earlier speeches this winter and spring from President Bush about were providing a tax cut to everyone who pays income taxes. And that was crafted pretty precisely. They basically said they were going to ignore social security despite the fact it's no secret that 74 percent of American taxpayers pay more in Social Security and Medicare is payroll taxes than they pay in income taxes and a fair number of them pap Solu nothing. In fact there was a concern that maybe some of this ought to be done on a per person basis as a rebate that was proposed for a brief period of time. The White House indicated that it was adamantly opposed. And then another alternative was to make some of this refund and be of some of these credits be

refundable so that people who have zeroed out their income tax liability but still owe some Social Security tax would actually be able to get some of that back. That was resisted mightily by the House of Representatives but the Senate did insist on it. And so they put it in in a very limited way for a very limited amount and only for a few years then it disappears. But the reason the taxes are always on the agenda is because there are very different points of view throughout our population. We just about six seven minutes left. Our guest this morning is Richard Kaplan he's professor of law at University of Illinois we're talking about the recent tax cut package signed into law just a week ago by the president and will try to get in some of the folks here in the time that remains and go next to a caller in or Banna on our line to go hypo during the discussion of the tax cut plan. I had read that in conjunction with this effort to get rid of the estate tax. Biggest states that what they were going to

do is harm the little folks and by the following that I'm wondering whether this is ended up in the final tax package when if you have stocks for instance and when you die you are passing them on your estate. The value of them is is figured based on the date of your death. My understanding is that there was going to be they're going to change that so the value of the. Are the basis of the stock to be figured out the mutual fund to be figured on when you purchased them. To me that seems like you're taxing the little guy because a whole lot of people are mutual funds and stocks. Now who would never have enough money to be to have their estate tax even under current rules. And I can I can imagine the record problems recordkeeping problems. I just can't imagine having to deal with it. Do you know what happened with that fine line.

Yes I do and it's much worse than you imagine. That is it's a super point a fairly technical one but the so called step up in basis rule that you're talking about enables people who receive inherited property to take as their cost the value at the death of the person from whom they received it. The only reason that rule exists is because theoretically that property has already been subject to a state tax. The fact of the matter is that for 98 percent of people who die there is no estate tax liability under current law because they don't have enough to reach beyond the exemptions. Nevertheless all of their heirs receive the benefit of that step up in basis rule. The difficulty comes as if you eliminate the estate tax for everyone. Then don't you feel compelled to eliminate the step up in basis rule for everyone as well. Which would have the effect exactly as you described of hurting the 98 percent of dissidents who never were subject to the estate tax. But instead are now losing the benefit of their step up. The first point

I would make is you don't have to worry about this for at least nine years because until the state tax is completely repealed the step up in basis rule is continued without adjustment even when the estate tax is repealed which is only for one year and only during the year 2010 so that everyone needs to focus on then that year if nothing changes. Even then they repeal the step up in basis rule but only for amounts that would have been subject to the estate tax so what happens is to protect people that you're describing the 98 percent who wouldn't pay the state tax anyway. They will retain the step up in basis and only for amounts over and above the exemption which will be about one point three million at that point or so will the carry over basis have to apply what gets even worse is that for people who do have estates of more than that exemption amount the heirs will

have to find out whether their specific property. How was part of the carry over or the step up rule. And they have no way of knowing that without knowing how much the total estate was and to make it even more unbelievable the executor will actually be able to determine who among the various heirs are getting a step up and which ones have a carry over basis so the existing record keeping that your time at now will be cranked up manifold. I guess would also apply to your home because you know many people have had their homes if they own them. Go up in value and that's true course homes can be sold right now for a tax exemption of half a million for married folks but this would apply to all property real estate residences stocks mutual funds etc.. Because the other thing that bothers me about this whole tax cut deal is that there's no sense of community. What we can accomplish together as a nation and for instance. Helping our elderly.

We don't pay people who take care of our elderly. Enough money that they can have a living wage. And so this constant turnover there's not an adequate training. Nursing homes have a hard time finding people who want to say in your home it's hard to find somebody that's adequate to care for you. And the government federal government is not adequately reimbursing people under Medicare so that they set the base wage which is really really low. And to me that is something I would forgo any tax cut for. To make things better. Because we're all getting older and our parents are getting older and that's just one of the things that we could have done as a community as a whole nation which you can't do by yourself. That's probably a subject for at least another separate program but you're quite right that it's a fundamental conflict. Namely is it going to be a sense of community or is it everyone for himself and you have a very different approach in Europe where tax rates are clearly higher but they provide health care they provide education in the sense that this is the community's responsibility

a countervailing. Theme in America and even more so under the current administration is every one for himself. Let those who can do so take care of themselves they don't want this kind of communal responsibility you see the same thing with Social Security privatization. Do you want a kind of general General floor or do you want everyone to be his or her own or her own retirement plan manager with the idea that some will come out ahead and many will fall behind and basically do we care about those. It's a perennial issue came up during the Clinton care debates about 1993 94. Remember a famous comment by one of the European economists to one of the people in the treasuries is how can the wealthiest country in the world with the fastest growth rate not afford basic or not provide basic health care for its citizens. And the response was. Did it ever occur to you that that may be why we have the

highest growth rate of the wealthiest country in the world so there is a strong anti communitarian in Paulson American politics. The Probably receded as far as I can tell in the 1930s. But it's not clear that that Medicare would be enacted today let alone Social Security that right now there is much more of a rugged individual ism which has always distinguished American public policy to some extent but you're quite right that this tax bill exemplifies it. We will have to stop there because we are at the end of the time I'm sorry we have some people we can't take but I expect we'll be getting back some of these things on future programs for the moment though I want to say to our guests to Richard Kaplan thanks very much. Thank you David Mitchell Kaplan professor of law here University of Illinois.