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Financial Literacy - Taxes
No new taxes? Why not?
Politicians who pledge no new taxes are either neglecting the facts or making promises they can't or shouldn't keep.
Taxes made easy

Interview: Adam Hughes

Why has Congress dragged its feet?

Talking points
What is the OMB?
AMT delay
Capital gains tax
Estate tax problem
Rich vs. poor
Starve the beast theory
Recession threat
Progressive tax
Activists' role

The main reason it's been delayed this year is because a number of folks in Congress wanted to do a comprehensive reform -- and the House actually wrote and passed an excellent reform, but it's almost guaranteed not to pass the Senate.

The main objection Republicans have to the reform is that it is revenue neutral, so it's perceived as a tax increase. Their objection is that the proposed reform increases taxes on multimillionaires and uses the revenue to make sure that 19 million middle class don't have their taxes increased. In some ways it's an example of the perverse priorities of some people in Washington.

How much does the average investor need to worry about what happens with capital gains tax?

If you look at the distribution of capital gains tax, the individual investor pays a very small portion of capital gains, both in terms of the amount of money paid and as a percentage of overall capital gains paid each year. Big investment banks, financial brokerage firms, hedge funds: those are the institutions and individuals who run those institutions who the capital gains reduction would mean the most money to. According to some proponents of capital gains reductions, 70 percent of Americans would benefit from a reduction in those taxes. I don't know how they arrive at that figure, but the true figure is probably closer to 5 percent who would really benefit.

The estate tax repeal seems to be running out of steam. What do you attribute that to?

Nothing will happen on the estate tax this year and since the estate tax affects so few people, I don't think anyone is really worried about it. There has been a lot of misinformation about the estate tax that has been circulating -- about who is affected by the estate tax. Proponents of repeal try to make you believe that everyone is subject to estate tax at death, but that is just not the case. Only about 1 percent of households have to pay estate tax.

There does need to be a solution to the estate tax. The law that was passed in 2001 is pretty stupid. The exemption amount keeps changing over the next few years. The reason they did that is to make it appear that repeal of the tax costs less than it does. More and more people I hear are for a revenue-neutral reform. Revenue-neutral reform, depending on the details, would be the most fiscally responsible alternative, so I'm encouraged. That's the newest development in the estate tax debate this year.

-- Updated: Dec. 26, 2007
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