The Largest Tax Hikes in History
If you have noticed your grocery bill and general living expenses increasing in recent months—brace yourself. In six months we are going to experience the largest tax hikes in history. Unless Congress makes some pretty large changes in current laws.
Note: Small businesses should pay particular attention.
What Are These Tax Hikes?
Following is a condensed version of a recent article written by Ryan Ellis, Tax Policy Director of Americans For Tax Reform, a centrist organization founded in 1985.
(Condensed version)
In just six months, the largest tax hikes in the history of America will take effect and hit families and small businesses in three great waves on January 1, 2011:
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011 and as a result:
- Income tax rates will rise. The top income tax rate for small businesses will rise from 35 to 39.6 percent. The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.
- Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1,000 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.
- The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1, 2011, there is a 55 percent top death tax rate on estates over $1 million. [All family owned businesses, especially agricultural businesses, need to plan now for this eventuality—bf.]
- Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.
Second Wave: Health Reform Costs
There are over twenty new or higher taxes in the new healthcare laws. Several will go into effect on January 1, 2011. Here is one of the most onerous:
- The “Special Needs Kids Tax” This provision of healthcare reform imposes a cap on flexible spending accounts (FSAs) of $2,500 (Currently, there is no federal government limit). This new cap will be particularly cruel to parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education…which can easily exceed $14,000 per year. Under current tax rules, FSA dollars can be used to pay for this type of special needs education.
Third Wave: The Alternative Minimum Tax and Employer Tax Hikes
When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:
- The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.
- Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment today. In January of 2011, all of it will have to be “depreciated.”
- Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.
- Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.
- Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.
Well, there you are. Unless businesses and individuals alike intervene with their elected representatives, this is what we have to look forward to. So, business owners and individual taxpayers, what do you say, …isn’t it time to let our elected officials know how we feel and what we want them to do in Congress?
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Putting Tax Cuts in Terms Everyone Can Understand
Some time ago I ran across the following post from Mark Gwilliam (see below), and I just had to post it here in its entirety. This might be a little tongue-in-cheek?
“Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve. “Since you
are all such good customers,” he said, “I’m going to reduce the cost
of your daily beer by $20.”Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so
the first four men were unaffected. They would still drink for free.
But what about the other six men – the paying customers? How could
they divide the $20 windfall so that everyone would get his ‘fair
share?’
They realized that $20 divided by six is $3.33. But if they subtracted
that from everybody’s share, then the fifth man and the sixth man
would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man’s
bill by roughly the same [ratio] amount, and he proceeded to work out the
amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four
continued to drink for free. But once outside the restaurant, the men
began to compare their savings.
“I only got a dollar out of the $20,”declared the sixth man. He
pointed to the tenth man,” but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back
when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get
anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine
sat down and had beers without him. But when it came time to pay the
bill, they discovered something important. They didn’t have enough
money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how
our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them for
being wealthy, and they just may not show up anymore. In fact, they
might start drinking overseas where the atmosphere is somewhat
friendlier.
FOR THOSE WHO UNDERSTAND, NO EXPLANATION IS NEEDED.
FOR THOSE WHO DO NOT UNDERSTAND, NO EXPLANATION IS POSSIBLE.
An excerpt from: David R. Kamerschen, Ph.D. Professor of Economics University of Georgia”
Mark Gwilliam is the founder and Managing Director of the Business Advisory Services Group a professional services organisation that provides accounting; tax; corporate governance & risk management; business consulting and secretarial services throughout New Zealand and Australia. Mark’s blog is very informative for all small businesses, and can be found here.
Good News for Small Business
It looks like action is finally being taken to unfreeze credit to small businesses. In a business roundtable at the White House, President Obama outlined actions to help small business, and get credit flowing again. As the President pointed out, this is just a first step in getting small business back up to speed, so they can begin hiring again.
Here is a CNN edited clip of President Obama’s speech to the business gathering.
(email subscribers–view on the blog)
This is what small business people have been waiting to hear. It is definitely a start to get small businesses back on track. There is still much to do about healthcare and taxes as they relate to small business, but it is encouraging to see the government taking steps to improve the current situation.
Another Inconvenient Truth
I had heard of this documentary film about America’s fiscal problems, and then a friend just sent me a short version of the movie. I think we all have our own ideas about what the current economic situation means, but this is the only place I have seen the actual fiscal facts pulled together. It was produced by Christine O’Malley, an Academy Award nominee, and directed by Patrick Creadon, of Sundance fame. The full-length movie is a nonpartisan film that follows former U.S. Comptroller General, David Walker, as he crisscrosses the country explaining America’s unsustainable fiscal policies to its citizens. It was made prior to the election, bailouts, and the stimulus bill, so some of the current conditions are now even more dramatic.
The facts presented in this shortened video affect every small business and individual in the U.S.–probably the world. Although the video is about 30 minutes long, I think, like Al Gore’s An Inconvenient Truth, it is important enough that, hopefully, readers would set aside the time to take a look at it.
(email subscribers–view on the blog)
With so much doom and gloom, and misinformation coming out of the Eastern press, it is good to see exactly what lies ahead of us, so we can act accordingly. We will know how to plan for our future business, and what we have to do to make our businesses successful. The U.S. may no longer be the industrial giant of the world, but we certainly are a large community of entrepreneurs that work in our homes, in garages, in forest cabins, in university dorms, and in every block of every city of America. With our innate spirit of innovation, we can overcome the fiscal problems of America–and we will.
If anyone spent the time to view this documentary, I would appreciate your thoughts.
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