The Tax Tsunami We Face

If you think things are bad now, wait until 2011 when Americans will be faced with an almost overwhelming tax load.
It will happen in waves and you can bet that all along the way we’ll be
told Congress will do something about it to the point that we are 5
years down the road and NOTHING will have been done.

First Wave

Bush Tax Cuts Expire. Congress didn’t even have the
strength of character to stay and vote on extending the Bush tax cuts
before running home to protect their professional political careers.
These tax cuts all expire on January 1, 2011. Thereafter, the top
income tax rate will rise from 35% to 39.6%, the same rate at which
two-thirds of small business profits are taxed. The lowest rate will
rise from 10% to 15%. All the rates in between will also rise.
Somewhere I seem to recall a promise about tax cuts for 95% of “working
families.”

Higher Taxes on Marriage and Family. The “marriage
penalty” (narrower tax brackets for married couples) starting with the
first dollar of individual income. The child tax credit will be cut in
half from $1000 to $500 per child. The standard deduction will no
longer be doubled for married couples relative to the single level. The
dependent care and adoption tax credits will be cut.

Death Tax Returns. 2010 is a great year to die; there is
no death tax. For those dying on or after January 1, 2011, however,
there is a 55% top death tax rate on estates over $1 million. A person
leaving behind a home and a 401k could easily pass along a death tax
bill to their family.

Higher tax rates on savers and investors. The capital
gains tax will rise from 15% this year to 20% in 2011. The dividends
tax will rise from 15% this year to 39.6% in 2011. These rates will
rise another 3.8% in 2013.

Second Wave

Obamacare will be the focus of congressional wrangling over the
next two years, but it is unlikely to be repealed in that time. There
are over 20 huge and completely new taxes contained within the new
health care law which was hurried through Congress without being read
and passed against the will of the American people. Several will first
go into effect on January 1, 2011.

They include:

The “Medicine Cabinet Tax.” Under Obamacare, the ability
to use pre-tax dollars from health savings accounts, flexible spending
accounts, or health reimbursement accounts to purchase
non-prescription, over-the-counter medicine will be a thing of the past.

The “Special Needs” Kids’ Tax. There will be a new cap on
flexible spending accounts of $2500 where there currently is no limit.
This will hit parents of special needs children particularly hard. Tens
of thousands of parents with special needs kids currently use FSAs to
pay for their kids’ educations – which can add up to tens of thousands
of dollars per year.

The HAS Withdrawal Tax Hike. The health care bill Nancy
Pelosi told us we’d have to pass to see what was in it increases the
additional tax on non-medical early withdrawals from a health savings
account from 10% to 20%, disadvantaging them relative to IRAs and other
tax-advantaged accounts, which remain at 10%.

Third Wave

The Alternative Minimum Tax and Employer Tax Hikes. The
AMT, which was originally intended simply to make sure that wealthy
taxpayers didn’t use tax shelters and other tactics to avoid having to
pay any taxes at all (a good start for an argument for a flat tax),
affected nearly 4 million families last year. Starting in 2011, it will
affect over 28 million families. According to the leftist Tax Policy
Center, Congress’ ineptitude and failure to index the AMT will result
in an explosion of AMT taxpaying families, each of which will have to
calculate their tax burdens twice, and pay taxes at the higher level.

Small Business Expensing Is Slashed and 50% Expensing Disappears.
Obama doesn’t understand that small businesses can normally expense
(rather than slowly deduct, or “depreciate”) equipment purchases up to
$250,000. This will be cut down to $25,000. Larger businesses can
expense half of their purchases of equipment. In January of 2011, all
of it will have to be “depreciated.” The effect is a huge tax and an
additional expense to the businesses which create jobs.

Tax Benefits for Education and Teaching Slashed. The
deduction for tuition and fees will no longer be available. Tax credits
for education will be limited and teachers will no longer be able to
deduct classroom expenses. Coverdell Education Savings Accounts will be
cut, as will employer-provided educational assistance. The student loan
interest deduction will be disallowed for hundreds of thousands of
families.

Charitable Contributions From IRAs Disappear. Under
current law, an IRA can contribute up to $100,000 per year directly to
a charity without penalty. This contribution also counts toward an
annual “required minimum distribution.” Not any more, thanks to a
compassionate and ultra-liberal Congress.

The Health Care Tax That Wasn’t. Remember when your
president told you straight-faced that when Americans are required to
obtain health insurance or pay a penalty it wasn’t a tax? He lied. In
defending the Obamacare mandate in court, Obama and his army of lawyers
are now defending the requirement as an exercise of the government’s
“power to lay and collect taxes.” How’s that hope and change working
out for everybody? I thought everybody making less that everybody
making less than $250,000 per year wouldn’t see an increase in their
taxes.

What’s the impact?

According to Laffer, “Tax rate increases next year are
everywhere.” Laffer says the coming hikes — coupled with the prospect
of rising prices, higher interest rates, and more regulations next year
— are causing businesses to shift production and income from 2011 to 2010.
In other words, 2010 income will be inflated above where it otherwise
should be and 2011 income will be dramatically lower than it otherwise
should be. Not surprisingly, the nine states without an income tax
are “growing far faster and attracting more people and businesses than
are the nine states with the highest income tax rates.” (ED. NOTE: Read more about that phenomena, taking place right now, here.)

History bears this out. A 2004 U.S. Treasury report reveals that
many taxpayers took wages and bonuses early — to the tune of more than
$15 billion — in order to avoid the ill effects of Bill Clinton’s
massive 1993 tax increases. At the end of 1993, these same individuals
re-shuffled wages and bonuses one more time to avoid the 1994 increase
in Medicare taxes.

History also reveals similar behavior after Reagan’s delayed tax
cuts — which were passed in 1981 but didn’t become effective until 1983
— caused a massive hiatus in economic growth in 1981 and 1982. The GDP
flatlined and the unemployment rate climbed well over 10%. In 1983,
when the tax breaks kicked in, the U.S. economy exploded, with real
growth reaching 7.5% in 1983 and 5.5% in 1984. We will see exactly the
opposite phenomenon in 2011.

Yet it isn’t just the tax increases that will kill jobs and small
businesses. A survey from the National Association for the
Self-Employed shows that businesses will experience a 1,250%
increase in the amount of tax-related paperwork required of them in
2012 — kryptonite for small businesses.

The new conservative majority in the House of Representatives has a
task of Herculean proportions staring them in the face. The fallout
from the coming tax storm will be a crash in tax receipts of monumental
proportions, even higher deficits, and more record unemployment. If you thought the Obama “recovery” of 2010 was bad, just wait until 2011.

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