Friday, June 18, 2010

And you thought THIS economy was bad

Just wait until next year.

The Bush tax cuts are scheduled to sunset on December 31st of 2010. That means, if Congress does nothing--which is their specialty--the highest marginal tax rate will rise to 39.6% from 35%. Taxation of dividend income will rise to 39.6% from 15%. The estate tax rate will shoot up to 55%--55%!--from zero. And then there are the state income taxes and sales taxes and property taxes and energy taxes, bridge tolls, dog licenses, auto license fees, and after all of these taxes don't forget the taxes to be imposed to fund Obamacare and Cap and Trade.

So let's do the math. I earn $1,000 and for the sake of argument let us allow that earning that $1,000 puts me in the top federal bracket. In short, I am rich. I immediately pay Uncle Sam $396, then I pay my portion of social security, state disability tax and state income tax which in California tops out at 11%. So let's be generous and estimate only another $150 in taxes. I will then, take home $454 from my earnings of $1000. Now because I am rich, I put that $454 in trust for my heirs.

Worked to the bone, stressed to the max, I suddenly die and my heirs settle up with Uncle Sam who takes 55% of the $454. They are left with $204 from my earnings of $1000.

Clearly this example is meant to be illustrative. I have not accounted for capital gains nor dividends. But I have also not accounted for taxes paid on capital gains and dividends. Most of the other insidious taxes imposed on Americans each day were also left out of my example.

A little known fact of the Obamacare Law (among many other unpleasant surprises in the fine print you can be sure) is a 3.8% tax to be imposed when you sell your home--most people's greatest or only asset. 3.8% to Uncle Sam right off the bat. So how will that tax impact those who are involved in distress sales, who are underwater on their homes?

Any way you cut it, the picture is grim. If people have the choice, as most small businesses or the self-employed do, to accelerate earnings into this year to avoid next year's draconian tax increases, they will do so without a second thought. This will most certainly cause the economy to contract next year "unexpectedly." And once the cap gains tax increase and the dividend increase and the home sale tax are implemented expect liquidity to evaporate from the marketplace. Both the stock market and real estate market.

And you thought things were grim now. Just wait until you see with the Obama Brain Trust has in store for you next year.

For the whole story read Dr. Arthur Laffer's editorial in the WSJ: Tax Hikes and the 2011 Economic Collapse. June 6th.

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