As Washington continues to put off the decision to extend the Bush tax cuts or allow them to expire, the private sector has begun making assumptions. The Obama administration and most Democrats prefer to extend the tax cuts to all except those who earn more than $250,000 per year. Republicans want an across-the-board extension. The moderate approach would be a temporary extension for the rich. But those who might be affected by the Democrats' approach are already preparing as though their fate is sealed.
The Wall Street Journal reports that wealthier Americans, including some small business owners, fear that their taxes will rise next year. As a result, they are figuring out ways to declare income this year that would otherwise have been realized next year to take advantage of 2010's lower tax rates. Here's one example, provided by the WSJ:
Mike Henry, of Henry Wealth Management in Natchez, Miss., said he is trying to move up income that would normally be carried over into the next year. One idea is to sell timber growing on 500 acres of land he owns in Louisiana. He is considering that option even though timber prices have been dismal because of the prolonged downturn in housing construction.
Waiting for a better price on timber next year is "speculative at best," he said. "Even if the price does go up on timber, that increase will likely be eaten up anyway by the tax increases," Mr. Henry said. He said he is looking at other possibilities as well, including cutting back on his work hours and reducing his income.
"This is not tax evasion," he said. "This is year-end planning."
Some others are cashing out investments now, to take advantage of low tax rates. Many wealthy Americans are particularly savvy about managing their money, so this sort of planning is likely ramping up as they become nervous about their taxes. What effect might this have on the recovery? It could distort things.