Saturday, January 9, 2010

Tax Tsunami

In the storm of the daily news flow: unemployment; terrorists on planes, terrorists being tried in our courts, terrorists shooting our soldiers on a U.S. base; the president vacationing in Hawaii in the midst of the Pantie Bomber crisis, playing golf and basketball, cool as a cucumber; corruption in his Cabinet, Timothy Geitner the tax cheat again; a failed $800 billion plus stimulus; the secretive, partisan, unconstitutional health care bill being finalized behind closed doors between Nancy Pelosi, Harry Reid and the President despite his repeated assurance of transparency; it is easy to miss the real storm brewing: the overwhelming tax increases headed our way on January 1, 2011. This isn't just a storm, my friends, it's a tsunami.

Before, we even consider the impact to the average American of health care and cap and trade taxes, let's examine the increase that will automatically take effect when the Bush tax cuts are allowed to expire at the end of 2010.
  • the personal income tax rate will rise from 35% to 39.6%.
  • taxes on dividend income will rise from 15% to the taxpayer's top rate on ordinary income (most likely 39.6%).
  • taxes on capital gains will rise to 20% from 15%.
  • payroll taxes on incomes over $200,000 will rise by 1.9%.
Now consider that the PelosiReidObama health care plan (from what little we know) will add a 5.4% increase on all income and capital gains. This means, the top federal income tax rate will rise to 45%. Same for dividends. Taxes on capital gains will rise to 25%. Cap and trade taxes will increase the burden even further.

Whether health care is passed or not, Americans are in for a significant increase to the federal tax burden they already pay.

The implications for the economy are great. Every dollar paid to the government in the form of taxes is a dollar that is removed from the private sector economy, the one that still supplies the majority of jobs in America. And if people know their taxes are going to rise in the following year, those with flexibility will push as much income into the lower tax year as possible (2010). That may inflate GDP and stock market performance in 2010 but as quickly and powerfully as the tsunami tide of growth rides into 2010 it will withdraw in 2011.

Our country has been set on a reckless economic path during the last year. The annual deficit has tripled, our long-term debt has risen significantly. Unemployment has risen, GDP has declined and yet we spend and spend and spend. Congress views our money as theirs and they use it to buy votes for their programs and pet projects (the health care payoffs of Senator Ben Nelson from Nebraska and Mary Landrieu of Louisiana being the most recent and the most egregious, though there are a multitude of others--just ask Chris Dodd of Connecticut). With tax rates high and rising it is fair to wonder how much more juice the government thinks it can squeeze from us turnips. Margaret Thatcher once said that the problem with socialism is eventually you run out of other people's money. Whether it is ours or the Chinese who are buying our debt, the spendthrifts in Congress would do well to wake up and start living within their means.

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