Both the Republicans and moderate Democrats are currently re-thinking whether the Bush tax cuts should be allowed to expire at the end of this year or vote to extend them at least until the recession is over. If Congress does nothing, here’s an overview of some of the more onerous changes:
- All income tax rates will rise with the highest tax bracket moving from 35% to 39.6%.
- The income tax penalty for married couples filing a joint tax return will return.
- The child tax credit will drop from $1,000 to $500.
- The death tax will be reinstated for estates above $1 million with a tax rate of as high as 55%. Millions of middle class Americans who own their home, a retirement account and life insurance will find themselves subject to a new level of taxes at death.
- Investors, including millions of retirees, will face higher taxes as the tax rate for long-term capital gains rises from 15% to 20% and the tax on corporate dividends rises from a maximum federal rate of 15% to a maximum rate of 39%.
- An estimated 28 million Americans will face higher taxes as relief provisions for the Alternative Minimum Tax are allowed to expire. This law, passed in 1969, requires you to calculate your income taxes twice, first the ‘regular’ way, then the ‘alternative’ way, then pay the higher tax. Current tax law provides a ‘relief’ provision so that only about 4 million taxpayers face the alternative tax.
As Americans, we face two conflicting objectives. First is the U.S. deficit which is now over $13 trillion and rising $4 billion per day. To put this in perspective, if every American citizen were to pony-up their share, each would owe $42,000! Obviously, if we don’t address our growing national debt, we will reach a tipping point…with devastating results. The second objective is to get our economy back on sound footing. Unemployment hovers near double digits; the housing market continues to languish; bankers continue to hoard cash instead of lending to small business owners who could use the funds to expand business and hire new employees; consumers continue to hunker down either through fear or because they have no choice.
The idea behind allowing the Bush tax cuts to expire is to raise taxes which can be used to pay down the national debt. The Obama Administration’s solution is to raise taxes only on top income earners thus addressing the deficit and the economy at the same time. However, raising taxes on the most productive American workers will create unintended consequences. Business owners facing higher taxes and uncertain regulatory environment will be reluctant to expand or hire new employees. In fact, they may do just the opposite…cut expenditures including workers. Consumers facing higher taxes, an uncertain economy and impossibly low earnings on savings will continue to pay down debt and hoard cash versus spending. Raising taxes during the worst recession since The Great Depression will worsen both the deficit and the economy.
What can you do about all of this? Get involved. Contact your congressional representative and express your views about extending the current tax cuts. Go to www.contactingthecongress.org.