Citing the fragile U.S. economy and the need for tax policies to promote recovery, a group of 47 House Democrats sent a letter to House Speaker Nancy Pelosi on Sept. 24, urging Congress to extend the current preferential tax rates on capital gains and dividend income. These legislators agree with manufacturers that lower rates on capital gains and dividends encourage savings and investment and benefit businesses and individuals alike.

Unfortunately, if Congress doesn’t act, tax rates on investment income will go up on Jan. 1, 2011. These tax increases will put a wet blanket on economic recovery. With tax rates on dividends at 40 percent or higher, there will be less capital for companies and job retention and creation efforts will suffer.

The National Association of Manufacturers’ latest Capital Briefing online newsletter summarizes the major tax issues at stake as the 111th Congress comes to a close and the 2011 expiration date nears. See “Focus: Congress Must Extend Low Tax Rates to Help Manufacturers.”

As we’ve been saying for a long time now, if Congress really wants to create jobs, the first move should be to preserve the current tax rates. Taxes on investment income are often overlooked — they’re complicated and unfortunately too many folks in Congress think that they’re only for the rich.

Thus it’s worth paying attention to today’s Wall Street Journal column by economist Allen Sinai, “Cap Gains Taxation: Less Means More.” Sinai lays out a compelling case why keeping rates low — and even lowering them further — actually stimulates the economy and creates jobs.

Congress is set to act, sometime this fall, on legislation that will determine the rates for investment taxes. While we like Sinai’s idea of zeroing out the capital gains tax, we’ll settle for keeping both capital gains and dividends at the 15 percent rate. It’s certainly a good starting point.

Speaking to a small group at a Middle Class Task Force roundtable yesterday in Washington, D.C., Vice President Biden noted, “It’s costly, but at a time of recession, you should not be raising taxes on people who need disposable income, or on small businesses, for that matter.” However, that is exactly what will happen if the 2001 and 2003 tax cuts are allowed to expire at the end of this year. 

Almost 70 percent of all manufacturers are organized as S-corporations or other entities taxed at the individual rate. If Congress fails to act, the top marginal individual tax rate will rise to nearly 40 percent. The estate tax, which was temporarily repealed for 2010, will go back into effect in 2011 at the jobs-killing rate of 55 percent. In addition, capital gains taxes will increase to 20 percent. These tax hikes will hit small and medium-sized manufacturers particularly hard. 

Allowing the low tax rates, which have been especially beneficial for small and mid-sized companies, to expire is the wrong approach for a fragile economy in need of policies that encourage job creation and competitiveness.

As of January 1, 2010, the federal estate tax falls to 0 percent. Unfortunately, as of Jan. 1, 2011, it returns to a top rate of 55 percent.

From The Blog of the Legal Times, “Estate Tax Battle Looms in 2010“:

“I think we all were really hopeful that everyone would come together and find that sweet spot that everyone could accept,” said Dena Battle, director of tax policy for the National Association of Manufacturers.

In the new year, lobbyists expect a rare effort to retroactively tweak the tax, which many are prepared to fight. . “I think there is going to be a significant effort to try and get this matter resolved early on,” Battle said. Chris Walters, manager for legislative affairs for the National Federation of Independent Business, said that “any tax increase that’s retroactive is unacceptable.”

USA Today reports taxpayers may be surprised to find that many estates are now taxed as capital gains. From “Estate tax set to expire Thursday“:

In the meantime, what might seem like a potential tax savings has become a guessing game for taxpayers, accountants, estate planners and tax lawyers. The impasse also could mean capital gains taxes on more inheritances.

“No one believed that Congress in its ultimate wisdom, with all the deficits looming, with a recession and two wars … would ever allow the estate tax to lapse. But that’s what’s happening,” said Martin Press, a tax attorney in Fort Lauderdale. “It’s created great uncertainty.”

Yes. Great, great uncertainty — and life-and-death consequences. From The Wall Street Journal, “Rich Cling to Life to Beat Tax Man“:

“I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days,” says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. “Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?”

UPDATE (6 p.m.): The expiration has definitely changed individual behavior, as witness USA TODAY’s founder, Al Neuharth, who writes a column, “For old, sick, rich is 2010 year to die?”:

In anticipation of the long-awaited death of the death tax, some at-risk people postponed some things until 2010. I know one person (me) who delayed until next week elective knee surgery (on both knees) that doctors recommended several years ago.

The odds are against my demise from that now rather-common surgery. But I decided to wait because I’ve carefully planned how to preserve in every way possible as much as possible of my little nest egg, not just for my wife but also for my eight children and two grandchildren.