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.