Don't Mess With Taxes

Everyone talks about how America's young people are going to have to pay tomorrow for today's budget excesses. Actually, they're already paying.

Case in point, the kiddie tax. OK, practically speaking, it's their parents now paying more (ain't that always the way it goes, Mom and Dad?). But the law that was changed last May officially applies to the investment earnings of youngsters, potentially bumping up the taxes collected on accounts held in a child's name. Details here.

Now, as the House and Senate struggle to agree on a bill to raise the minimum wage from $5.15 an hour to $7.25 an hour, kids and taxes are back in play.

Even with last year's changes to the kiddie tax, it's still possible for parents to move some assets to lower-taxed progeny. As long as the holdings don't earn more than the annual ceiling ($1,700 for both the 2006 and 2007 tax years), the earnings are taxed at the young investors' lower rates.

But in order to pay for the business benefits Congress thinks it needs to get the minimum wage  hiked, the Small Business Tax Relief Act (H.R. 976) proposes an end to such income shifting for some families. According to the bill summary:

"H.R. 976 would deny the lowest capital gains and dividend rate (currently 5%, next year 0%) to certain dependent children to prevent wealthy taxpayers from shifting income to their children to avoid taxation on capital gains and dividend income."

This investment transfer option, continues the summary document, "presumably was enacted to provide low-income individuals with capital gain and dividend reductions."

Hmmm. OK. I appreciate the ostensible concern about the less flush among us. But really, how many "low-income" individuals are investing any amount, much less finagling accounts between parents and kids?

Income shifting has always been a technique used primarily by folks who have enough money to worry about finding ways to ensure that their money makes even more. Plus, more well-to-do taxpayers are able to pay advisers to clue them into these type of tax-saving arrangements.

How many "low-income" folks have financial professionals managing their weekly paychecks?

But, hey, if Representatives say they want to codify the "spirit" of the original law, I say go for it. Simultaneously raising a few bucks to meet the House's pay-go rule is just icing on the revenue cake.