Just over a week after the election, and Obama has ramped up into full class warfare mode. In his first press conference, he said that the recent election has given him a mandate for raising taxes on the rich. He is insisting that those households that make more than $250,000 should pay higher taxes. This is his first step in "curing" our deficit problems. By not extending the tax cuts for those making more than $250K, the Congressional Budget Office (CBO) estimates that in 2013 and additional $42 billion in taxes will be collected and in 2014 the amount will be $38 billion. Folks, our government spends $3.6 TRILLION per year. The increased tax collections from taxing the "rich" amount to 3 - yes, THREE, days worth of government spending. And understand that there are implications to increasing taxes, one of which the CBO calculates will cost the economy 200,000 jobs. I have no doubt that to move toward curing our nation's financial problems, there will have to be tax reform (not necessarily increases. More on that in a moment), but there has to be serious discussion about entitlement and spending reform, none of which have occurred. Look past this charade and realize that we have a spending problem in this country that has to be addressed if we are going to get back on sound financial footing. No amount of class warfare and demagoguery by Obama or the left will change that fact.
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There is going to be significant and often heated discussions about taxes in the coming days and weeks. Here are some things you should know (WARNING: ECONOMICS AHEAD) about what is being discussed and how it impacts you. The nominal tax rate is the stated tax rate for a particular income level. For example, if a household has a gross income of $70,701 to $142,700, you are in the 25% tax bracket. The marginal tax rate is the rate that applies to earning one more dollar of of income. It is the change in our tax obligation if our income rises. For instance, if a family has an income of $142,000 and they have an opportunity to increase their income by $10,000, the tax on that will not be 25%, but 28% as the additional income moves them into a higher income tax bracket. The effective rate is how much of the income does the government actually capture. For instance, my family that was just getting ready to move into a higher tax bracket may offset that move by increased deductions, such as moving to a bigger house and paying more mortgage interest or increasing charitable contributions. All of us try to legally lower taxes by lowering our effective rate. We may contribute more to charitable enterprises and claim as many legal deductions as possible so that we are paying less in taxes. As we debate tax increases, be aware that most families have a limited ability to manage their effective tax rate. Our ability to make certain deductions and legal tax saving moves is limited and will be further limited if certain deductions are lowered or eliminated. And this means that raising tax rates will fall squarely on our shoulders, not the "rich" that Obama was to punish.
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While there is a lot of focus on rising tax rates if Congress fails to act by January 1, there is an aspect of the fiscal cliff that hasn't been discussed very much. But it will be. That discussion will center around the Alternative Minimum Tax (AMT). Currently, there is a patch in place that keeps most taxpayers from being affected by the AMT. If the AMT is not extended or modified, approximately 33 million taxpayers will fall under the AMT. What does that mean? A very large- and unexpected- tax liability for the current tax year. If Congress does not act on extending the AMT, then it becomes retroactive for 2012. What happens then? It creates a minimum tax rate for filers of 28%. Not only that, but child care costs are no longer deductible. Charitable contributions will not be deductible (think that will crush non-profit organizations?). Real estate taxes will not be deductible. State income taxes will not be deductible. These are standard deductions that many taxpayers claim to lower their federal tax liability. The effect of this is to increase marginal tax rates well beyond the 28% level (see the item above for the discussion of marginal tax rates). The effect to every tax payer is going to be more of their income subject to taxes. Think that is going to help a struggling economy? Pay attention to the battle that is occurring about how to deal with the fiscal cliff. All of us that are paying taxes are going to be dramatically impacted, and not just by raising tax rates.
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And that, my friends, is my view.
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