Monday, September 24, 2012

97 Days To Taxmageddon!

You’ve probably heard the name Taxmageddon, but you may not know exactly what that means. Taxmageddon is the name given to the largest tax hike in American history and it’s due to happen on January 1, 2013. It is the result of poor thinking in the legislative process as well as Obama’s policies, and it should pretty much dinosaur our economy with extreme prejudice. Here’s what’s coming.

The 2001 and 2003 Tax Relief Acts: The 2001 and 2003 Tax Relief Acts both lowered numerous tax rated but included sunshine provisions which made the tax cuts expire unless they were reauthorized by Congress. The thinking at the time was that this was the only way to get the Democrats to agree to the tax cuts and it would force the Democrats to keep voting for tax cuts right before various election cycles or the Democrats would need to explain to the voters why they allowed the tax cuts to expire.

I’m not a fan of this strategy because (1) this underestimated the ability of the Democrats to deceive average voters as well as their desire to please their progressive flank, (2) this put the Republicans in the position of having to vote “tax cuts for rich” before each election, and (3) it bought into this assumption that somehow tax cuts are the equivalent of spending and needed to be re-authorized or they would return to their higher “default” levels. These are all bad things. And now we can add a fourth. Since the Democrats have nothing to lose by hurting the economy and are playing to their left flank, they have stopped all attempts to reauthorize these tax cuts before they kick in on January 1. Here’s what will happen:

Each personal income tax bracket will rise (10% => 15%, 25% => 28%, 28% => 31%, 33% =>36%). The capital gains rate rises from 15% to 23.8%, the dividend rate rises from 15% to 43.4%. Itemized deductions will begin to phase out again. The marriage penalty returns. The child tax credit falls from $1,000 to $500. The level at which the death tax applies will fall from $3 million to $1 million.

ObamaCare Taxes: Starting January 1, 2013, several of the ObamaCare taxes kick in. There are twenty such taxes in ObamaCare. Several have already gone into effect, like the tanning tax, the tax on withdrawals from your HSA, and others. New taxes taking effect will include:
● A 2.3% excise tax on medical device manufacturers. There are 12,000 plants across the country employing 409,000 people. Several plan to close and reopen in China because of this tax. Whether this is true or not, it will increase the cost of medicine.

● The Medicare payroll tax will increase from 2.9% of wages to 3.8% for wages above $200,000 ($250,000 if you’re married).

● Flexible Spending Accounts (FSAs), which can be used to pay medical expenses with pre-tax dollars, will be capped at $2,500 per year. They are currently unlimited. These have been popular with families of children with special needs who use them to pay for tuition at special schools.

● The threshold for deducting medical expenses will rise from 7.5% of AGI to 10% of AGI.
The Alternative Minimum Tax: The Alternative Minimum Tax is a way to phase out deductions for people with high incomes. This was reduced, but will now increase again, snaring 31 million families in 2013 as compared to 4 million in 2012. Business expenses for the purchase of equipment will also be reduced to 50% of the value of the equipment from 100%. That will hurt manufacturers as fewer people will replace equipment as it becomes comparatively twice as expensive as before. The deduction for tuition will be eliminated, encouraging people to stay away from college. IRA rules will be changed too to prevent retired people from deducting amounts paid to charities.


What you have here is a disaster. Income tax rates will go up, which reduces the incentive to work. Taxes are going up on manufacturers in competitive industries, meaning they are more likely to leave for China. Business expenses are going way up across the board, which will make it very hard for small business. Taxes are going up on education and college. Health care spending and giving to charities will be discouraged. Savings and investing will be taxes at much higher rates, so will dividends which will hurt old people.

If you set out to hurt the American economy, you couldn’t have done much better than this plan. Not only is this the largest tax increase in American history by far, but it’s targeted to make business less competitive, health care more expensive, and to get people to make decisions (like skipping college or saving less) which will hurt their long term financial health.

Wow.

70 comments:

Jen said...

Andrew,

I've been hearing about this for quite some time now, so it's no surprise to me, and yet there are still some people who think that they will not be affected.

What I'd like to know is, what would you like to see happen to possibly avert this disaster? A Romney/Ryan victory would help, but things would still need to be put in place to stop as much of this as possible from happening.

In your opinion, is there still hope?

K said...

I'm becoming pessimistic about the election. If Obama gets back in, he will be "flexible" enough to let the automatic tax increases take place - even vetoing the congress if they try to avert it - while posturing about the Republican whining about deficits. If this happens, I'd say we're in for another four years of the same economy we have now.

BTW, wasn't McCain instrumental in pushing the "expiration date" on the Clinton tax repeal?

LL said...

Add to that the automatic triggers that slash the Defense Budget to the bone... perfect storm.

Anthony said...

Nothing to do but prepare to take the hit. Nothing which requires Congress and the President to be on the same page is going to happen.

BevfromNYC said...

Or...tax strike. They can't arrest us all.

Tennessee Jed said...

I had seen (and actually printed out) the article on this posted by the Americans for Tax Reform organization. They are looking for funding of course to help publicize exactly what is coming down the pike. Needless to say, much of the media would prefer us to focus on other things.

AndrewPrice said...

Jen, Unless the Democrats start to panic, the only way to prevent this is to pass it so Romney can sign it on day one and then include retroactive provisions to undo it for the few weeks Obama was still President. That is what I think will happen.

But even if that does happen, this points exactly how insane our system is. Look at all the individual changes. We need a much simpler system that wipes all of this out.

AndrewPrice said...

K, I suspect Obama would allow most of these taxes to go through but will make a big deal about trying to stop some of them.

Yes, McCain was instrumental.

AndrewPrice said...

LL, The defense cuts are going to be interesting because companies are going to start issuing pink slips soon -- before the election. So it will be interesting to see what ultimately happens.

AndrewPrice said...

Anthony, That's true. I could imagine some sort of 30 day deal, but most likely these things will go into effect. So everyone needs to get ready for this. Which should also further hurt economic growth because people need certainty to plan and this is a huge uncertainty waiting.

AndrewPrice said...

Bev, LOL! Great ideas! :) The absolutely can't arrest us all!


Strike! Strike! Strike! Strike! Strike!

AndrewPrice said...

Jed, This is something the Republicans and the conservative media should be pushing. When people hear that their taxes will be going up automatically unless the elect Romney, that will change many minds.

Obama is actually running ads out here claiming he plans to cut taxes on everyone.

T-Rav said...

A friend of mine the other day said with a straight face that we had lots of growth in the '50s, when the tax rate on the rich was 90%, therefore raising taxes was no problem. My reply: "Then why did JFK feel the need to drastically cut taxes across the board when taking over?" No answer.

AndrewPrice said...

T-Rav, We were also the only game in town -- all the rest of the world had been destroyed and was rebuilding by placing orders with American factories. Plus, we had flood of labor into the market and very few people fell into this "rich" category. The taxes on the rich today his a LOT more people -- productive people.

Individualist said...

Andrew

Their is another effect of all of this that we are not considering. The loss to revenue due to the tax increase.

Although this sounds wrong, "How can revenues decline when taxes go up?" It makes a lot of sense. Once the rates kick on dividends and captial gains people will begin to make use of tax free investment strategies. No, I am not talking about evil bank accounts in the Caymon Islands although some rich people will make use of this. I am talking about municipal bonds and other instruments that delay the recgnition of revenue that are perfectly moral and legal.

The net effect of this will be to lower tax revenues since every percentage point you increase teh tax rate means that tax avoidance strategies become that much more palatable. In the 70's under Carter we had 70% tax rates and people actually talekd openly about trying to find investments that would give them a loss. This will be bad for the economy as investment will be wasted on unproductive activites instead of building businesses that will remain profitable.

This might not be so bad except that the looming deficits and a debt exceeding our GDP is already affecting interest rates. The credit review agencies downgraded our debt just last month again as a result of the QE3 quatitative easing. We can't afford the increase in interest rates.

This is not just bad for individuals in this country. It is bad for the economy as a whole.

tryanmax said...

Andrew, I hate to play the cynic (oh wait, no I don't) but how do you know that this isn't exactly how Obama plans to "cut" taxes? Hike them first, then bring them down. That's the same method he's used to measure his "success" with the economy so far: drag it to the depths then claim that he stopped the fall when it hits the bottom.

What's truly outrageous is that, in spite of how complicated it all is, there appears to be a direct target on all the sorts of deductions that majority of Americans support. Especially the family-related ones. If it weren't for a slanted media, Romney should be an easy sell to the American people. Grr!

-----

Somewhat OT, but worth sharing; I got a great email this weekend that I want to sum up for you:

For those of you (like me) who have Christian friends that say they can't vote for Romney because he's a Mormon, ask them to please read Jeremiah 29 and think about how that should apply to the American Babylon today. In this chapter, God has exiled the Jews to Babylon, a PAGAN anti-God land. But look what God tells them to do.

Does he tell them to rebel and try to overthrow the city? No! He tells them to live peaceably within it; to seek the "shalom of the city". He tells them to pray for the welfare of their city of exile because "its welfare will determine your welfare." (v.7). In other words, he tells them to work for the prosperity of the pagan culture they find themselves in.

So which candidate do you think will bring more peace and prosperity to America?


We now return you to your regularly scheduled comments.

tryanmax said...

FYI, before anyone quibbles about the exact tone of the email, know that I find some of it a bit strong myself. But the overall point of the email is solid and I think should be used to put some of these "holier-than-thou" types in their place.

T-Rav said...

tryanmax, I know some relatives of mine who would hardly be moved by that statement. Of course, they also consider voting for a Mormon better than voting for a Muslim, so there's that. :-/

Individualist said...

Tyranmax

My mother's father was protestant but he moved to Utah from Pennsylvania. He had five sones and five daughters and all the daughters except my mom married local mormons. My Dad was at the University of Utah studying to be a meteoraologist for the Air Force at the time.

Thus I have a great deal of family that is Mormon. We went to Utah for the Olympics and when we walked on the streets of downtown Salt Lake City there were people handing out disgusting flyers telling people to watch out cause Mormons would proselytize to them. The things stated were just terrible. It was really hurtful to my Aunt who we were with.

Mormons are incredibly nice people and as far as I can tell their only vice is Ice Cream. the most provocative swear word they use is "Oh my Heck!".

Far as I am concerned the holyier than thou types need to just stop and take a deep look inward....

AndrewPrice said...

Indi, That's true in a general sense, i.e. the Laffer Curve, but I doubt these rises are at the level where that will really happen. I think the more likely result is that they just won't bring in as much as expected.

AndrewPrice said...

tryanmax, I suspect that is exactly what Obama is planning (and maybe the Republicans too). They will vote to stop most of these tax hikes and will then claim they cut taxes. But I think Obama will play chicken with the upper brackets as well, putting the Republicans in the position of "supporting tax cuts for the rich."

AndrewPrice said...

tryanmax, That's an interesting e-mail, but I doubt it will play with the religious right because they have misread the Bible as saying, "use the government to force unto others all the stuff you believe... and remember, you are your brother's warden." So this kind of flies in the face of that understanding of the Bible.

AndrewPrice said...

T-Rav, In my experience the deep religious right isn't move by anything except their own desired result, and they aren't going to let the Bible get in the way of their interpretation.

AndrewPrice said...

Indi, I have no respect for the holier than thou types.

BevfromNYC said...

I still don't get the "hate Mormons" thing.

AndrewPrice said...

Bev, They're a cult! They misread the Bible! God will smite them... and the rest of you 96% of Americans and 100% of the rest of the world! You're all wrong and you all need to die!!!

DUQ said...

Wow! Drudge is showing a poll where Romney has a 14% lead among the Middle Class! That speaks volumes to Obama's class warfare crap.

AndrewPrice said...

DUQ, I saw that. And given that the middle class is the largest voting block by far, Romney should win this election handily. So why don't the polls match? Good question.

BevfromNYC said...

Andrew - Oh, that explains it. All I can say is...YIPES!! Who knew they had such power. Dang them Mormons to heck and back!

AndrewPrice said...

Bev, I'm only half kidding. The real fringe ones I've spoken to are basically the same thing as radical Islamists, they just read a different book and don't know how to make bombs. They believe that so long as the US is guided by cultists, like Catholics, Mormons, Jews or other heinous libertines, God will punish the country. And they think the only valid purpose of governmental power is to force their religious views on all those sinners so God will appear... and to keep the welfare checks coming.

I have zero respect for those people. Sadly, they are rather influential in the Republican Party.

Joel Farnham said...

Andrew,

I never was a fan of this piece of legislation having sunset provisions.

Basically this is Obama giving the finger once again to the United States.

Too bad the idiots couldn't put sunset provisions on EPA and TSA. That I would have loved.

Jen said...

My ex has an uncle who went from being Catholic, to Mormon, and once in a while during holiday gatherings, they would bring their "brothers", or whatever they were called. I guess is was some sort of mission they were on.

His mom's other brother converted to Seventh Day Adventist. Those two uncles never bothered me as in trying to get me to convert, although I thought some of their beliefs were a little strange. They were also the only ones in the immediate family who I could still talk to after the split, and didn't hold anything against me.

Individualist said...

Andrew

The same democrats that put in place a 70% taxd rate are the ones to leave in loopholes like the At Risk Exclusion for real estate (where for a 10K investment with no liability you could get 100,000 in losses on K1's)

Remember it is not just 36% For the wealthy there is that 3% surtax to 39%. I am not talking about the laffer curve which is an economic extrapolation.

The tipping point is where the interest income on a municipal bond becomes much more profitable than the after tax income on stock sales and dividends. With a struggling economy that goes south once again this could very likely make whatever gains in tax revenues not worth the effort and if the perfect storm comes our way then the tax revenues will decline anyways from the bad economy.

I know I am a pessimist but I had to do a lot of research in school for economics and finance classes and the picture was really bleak.

I think this last little easter egg though might be one more jab at Romney if the Progs think they have lost. Maybe they hope to sink the economy for his first term.

AndrewPrice said...

Jen, I've liked the Mormons I've met very much. Fortunately, they stopped trying to convert me when they realized I am the sum total of my vices. But they were still very nice people. The only religious people I could not stand where the fundamentalists, who were positively hateful about everything. I guess their Bible has a few typos?

As for whose beliefs are strange, frankly, everyone is rather stupid about this. These are questions of faith because they cannot be proven right or wrong. So basically, everyone is just guessing. And I find it amazing how many people think their guesses are provable fact and everyone else is wrong.

AndrewPrice said...

Indi, I'm not sure what the Democratic plan is at this point. If the Republicans beat them over the head with the tax hikes, then they will want to repeal it now and claim credit for it. If not, then I can see them wanting to leave it to sabotage Romney or for Obama to claim it if they then go along with the repeal.

Either way though, this is just so much more evidence that the whole system needs to be replaced.

AndrewPrice said...

Joel, I think it was a foolish idea to include sunset provisions in this legislation. I get what they were thinking, but it really was blind and stupid because they assumed the Democrats wouldn't try to spin this or game the system... which they always do. That's bad thinking.

rlaWTX said...

It's not just the religious right that are Mormon-bashing! My (very conservative theologically and politically) mom got harangued by a very liberal cousin this weekend at our reunion about the evils of Mormonism - and by extension Romney. But this was a pre election-politics thing since we all got to hear it last year about Twilight's author too... it might have been an out-growth from Prop 8 in CA.

As for Taxes, Jobs, etc - I keep seeing that if those evil Republicans hadn't blocked all the great legislation the Dems have tried to pass in the last 4 years, unemployment would be so much lower and the economy so much better (nope, not making this up)!

T-Rav said...

I'm fairly neutral about the Mormons. I dislike points of their theology, though no more so than some other denominations; as for the church members themselves, I've known quite a few over the years. Most have been very nice, a few have been kind of weird, but I can't say I've met any that I genuinely disliked. I would probably genuinely dislike Harry Reid if I met him, but I doubt he's a practicing Mormon anyway.

T-Rav said...

Indi, in my experience, the best way to respond to that is to take the flyer, give it a once-over, and then immediately tear it up. It's not very nice but it's an effective means of demonstrating to them that other people think they're full of crap.

In my personal opinion, the problem today is too little proselytizing, not too much.

AndrewPrice said...

rlaWTX, Liberals see Mormons as extreme-conservatives with misogynist views. So that's where they get that hostility.

On taxes, that is the line, incredibly. The left really is pretending that the Republicans stopped them from getting their agenda in place, which would have made everything perfect. They conveniently forget that the Democrats could have passed anything they wanted, and didn't. And we were promised that the things they did pass would fix everything. It's only now that their policies have failed that they are trying to claim they needed more which the Republicans wouldn't let them have.

It's propaganda.

AndrewPrice said...

T-Rav, I get the sense that Reid is a real asshole. In terms of some of them being weird, I agree, but I find that with any group -- some members are nuts, others aren't. I will say that as a group, however, they seem like decent people.

On their beliefs, I'm not bothered either way. I believe in live and let live and just leave me alone and we'll do fine. :)

AndrewPrice said...

T-Rav, I like to laugh before I tear up the fliers. That really upsets them. :)

T-Rav said...

Andrew, that merits a rare LOL from me. :-)

LawHawkRFD said...

Andrew: You made a very good point about Kennedy and his tax cuts. It shows that a politician who actually has the country's interests at heart will do the right thing even though it wasn't the thing that got him elected. There was the "youth thing" along with others, but the big thing was who was going to protect us against the communist advances. Nixon seemed weak and "me too" on foreign policy. There was even the "missile gap" which turned out to be false, even though it helped Kennedy. But he saw that the economy was sputtering, so he did the one thing that spurs it--he cut taxes.

AndrewPrice said...

T-Rav, The leave me alone part or the laugh before you tear part? :)

AndrewPrice said...

Lawhawk, Sadly, I did not make the Kennedy point. I believe you are the first to make that point. LOL! :)

Jen said...

Bev, I'm with you on the strike, and if they put us together, then we can get them from the inside out.

tryanmax said...

That is one of the most astounding assertions of the Democrat party at present, that somehow the Republicans obstructed their every move with magic for the first two years of the Obama administration. OOOOoooohhhhh! (Okay, that sounds much lest ghostly in print.)

AndrewPrice said...

Jen and Bev, It sounds like a plan! LOL!

AndrewPrice said...

tryanmax, They've been pushing that idea from day one. They totally ignore that they controlled both houses of Congress with a filibuster proof majority. They claim that they were just trying to be inclusive as the Republicans tricked them into waiting by talking about bipartisanship, and by the time they realized the Republicans were lying, they'd lost control.

Yeah, right.

Individualist said...

Andrew

On that I completely agree.... system is broken...

We need lower rates on total income with little nonsense about what is or isn't a deduction. figure out what is fair to tax and take no more.

As to the Republicans getting in poor Barry O's way...

I seem to remember the GOP minority leader after the election asking the Dem's about being allowed to attend these meetings to have some input. wehat was that thoughtful inclusive thing nancy Pelosi told him...

Hmmmm....

Oh year that's right "We Won"

We need an add to air with her saying this....

Joel Farnham said...

Where are you guys getting the information on anti-mormanism from the right? I haven't seen any lately.

AndrewPrice said...

Indi, I think that as long as we allow deduction, the game will continue. I would rather see something like a flax 15% tax with a $1000 credit and leave it at that.

The idea that the Republicans stood in the Democrats' way is a lie they are using to explain away their failures. There's simply no truth to it.

AndrewPrice said...

Joel, I see it occasionally, but more often in person at the moment. I was at an office last week where this guy just went on and on about "the truth" of Mormonism and how Romney was going to open the door to the anti-Christ. Nobody wanted to hear it, but he wouldn't shut up. So I finally told the guy to shut the f*ck up.

tryanmax said...

I have a personal announcement to make. I never thought that a bumper sticker slogan could ever change my mind about anything, but over my lunch break, one did just that. As a result I will be changing my party affiliation.

The bumper sticker said simply, "Kenobi '12, Our only hope."

So, I will be leaving the Republican party and will re-register as a Jedi post haste.

AndrewPrice said...

Interesting... do the Jedi have any literature you can share with us? ;)

tryanmax said...

Andrew, I don't know if they have any literature on it, but I understand they've obtained the plans for the Debt Star and have discovered its weakness.

AndrewPrice said...

I wouldn't worry about its weaknesses, it will collapse under it's own weight.

Joel Farnham said...

Andrew,

Did he shut up about Mormons or did he go louder?

AndrewPrice said...

Joel, He shut up, but you could tell he didn't want to and he was going to start right up again the moment he left.

He realized he was outnumbered when nobody stood up to help him.

T-Rav said...

Andrew and tryanmax, unfortunately the collapse could take us all down with it. Better to send in a few X-wing fighters to blow it up first.

AndrewPrice said...

T-Rav, Good thinking! LOL!

rlaWTX said...

How 'bout a few "right" wing fighters...?

conservative anti-mormon stuff: I'm out of the fundamentalist loop these days, so I don't know if the stuff I grew up with is still alive and well this election cycle. By now, most realized that a Catholic prez didn't put the pope in charge, and a Mormon prez is better than TOTUS.
my politically conservative family in S Idaho (who have issues with the Mormons for various reasons) have thoroughly endorsed "the Mormon instead of the Moron"...

AndrewPrice said...

Nicely done rlaWTX! right-wing fighters! LOL!

I'll be happy too if these people pick "the Mormon instead of the Moron." That works for me! :)

Jen said...

Andrew, Maybe I should have said 'weird' like T-Rav did when referring to a certain Mormon, instead of 'strange'. I was in my early 20s when I met them, so that was my first impression.

I wonder if converts behave differently than the ones who are raised as Mormons. Although these people were nice to me when I had contact with them, they did some not so nice things later on (to family members) after the mother of the uncle died. I haven't seen them since that funeral. I'm not trying to imply anything, just stating facts.

I too will pick the Mormon over the Moron--it does come before 'moron' in the dictionary.

AndrewPrice said...

Jen, I have no idea as I've never known who was a convert and who wasn't?

I'll take the Mormon t

ellenB said...

Andrew, You didn't finish your thought. LOL! I hope the Moron didn't get you? ;D

This tax thing is amazing. You're right that it highlights just how messed up our system is that so many individual things can change in the tax code essentially randomly. Streamline streamline streamline!

AndrewPrice said...

Ellen, I was indeed taken away mid thought. LOL!

That tax thing really does point out how fundamentally wrong our system is. A system that can be tinkered with to this degree is a disaster.

wahsatchmo said...

Andrew, since taxation is a topic near and dear to my heart (it's my livelihood, after all), thank you for bringing this up. I don't know how many people are aware of the coming disaster, but it will affect everybody, since the '01 and '03 acts lowered taxes for everybody, including the middle and lower income rates.

I fumed at Bush for allowing the sunset provisions, but whatever. I originally didn't like the 168(k) bonus depreciation provisions that let businesses immediately write off new personal property without making a 179 election, but I was surprised when my clients made an effort to reinvest in their businesses to take advantage of it. Applying the 15% cap gains rate to qualified dividends was brilliant, and should be preserved.

But yeah, cap gains pre Clinton were taxed at 28%, and now they get the surtax to feed the Obamacare beast. Plus a heartless and stupid tax on gross REVENUES of medical device companies. To hell with R&D then, I guess.

But the Democrats' plan with regard to taxation is simply this: "fairness." Or as I will describe it in my natural French dialect: "bullshit." I've argued before that there is no fairness in tax policy, there is simply what the market will bear.

The market is, of course, the taxpaying populace (the 53%, according to Romney). The default increases from the sunset provisions will create capital flight, meaning investors will abandon private US companies for foreign investments (foreign tax credits still exist, even if US taxes go up), plus you'll see a distortion in the muni bond market where bonds with higher risk will be sold at interest rates incommensurate with risk.

And then the municipalities will default, leaving many pensioners et al holding paper about as valuable as GM bonds pre government intervention. Then we'll blame the rating agencies once again for believing that government bonds are worth at least one "A" in their rating system.

This will occur promptly before the next downgrade of the US treasuries issued to once again bail out the profligacy of the local and state governments' unsustainable pensions and foisted health care obligations.

But hey, what about those tax returns prior to 2010, right? Right?

AndrewPrice said...

wahsatchmo, I agree across the board. Excellent points!

One thing which has always astounded me is how the Democrats just don't understand that people will react to change in the tax code. They still stop investing or move their money beyond the border, etc. They really don't get that, and they think people will just keep right on doing what they've been doing.

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