Federal Triangle / Commentary/Columns

Beware of Taxmageddon

September 12, 2012
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Here are a few facts about a coming condition named by many economists as Taxmageddon, or the “fiscal cliff.” It is critically important to focus on these facts:
  • Government cannot invest, only spend money collected in taxes. Know that investment occurs when a person uses their own money for advantage. The government has no money other than what is collected in tax, which still belongs to taxpayers.
  • The only source of tax revenue is the private, profit-making sector of the U.S. economy.
  • No government employee pays taxes, only recycles taxes paid by the private sector.
  • Only Congress, the House of Representatives specifically, can appropriate tax money (with Senate concurrence) for government spending.
This is Civics 101, no matter what any politician says. And most politicians in Washington are liars, regardless of party.

There is a confluence of fiscal policy change that may occur at the end of 2012 that will create this Taxmageddon. A July report prepared by Ernst & Young on behalf of the Independent Community Bankers of America, U.S. Chamber of Commerce, S Corporation Association and National Federation of Independent Business describes tax-law changes that can occur the first day of 2013.

The E&Y analysis describes impacts on “flow-through businesses,” S corporations, LLCs, sole proprietorships and partnerships. The predictions are not good. These are the companies, probably like yours, that cumulatively pay 44% of all business income taxes and employ 54% of private-sector workers. Four classes of provisions will increase the tax rates: 1.) two top income tax rates go from 33 to 36% and 35 to 39.6%; 2.) limitations on itemized deductions; 3.) taxation of dividends as ordinary income at 39.6% and 20% on capital gains; 4.) increase of Medicare tax from 2.9 to 3.8%.

These are the business taxes to which personal tax increases are added. The top tax rates on ordinary income will rise from 35 to 40.9%, on dividends from 15 to 44.7% and on capital gains from 15 to 24.7%. Therefore, these new and higher taxes that begin Jan. 1, 2013, increase the average marginal tax rate (AMTR) on business, wages and investment income for wages by 5%, flow through business income by 6.4%, interest by 16.5%, dividends by 157.1% and capital gains by 39.3%.

This is certain to result in a smaller American economy, fewer jobs, less investment and lower wages. The real, long-term economic consequences mean lower national output and living standards. It is forecast that output will fall by 1.3% (or $200 billion), employment will fall 0.5% (or about 710,000 fewer jobs), capital stock and investment will fall by 1.4% and 2.4% respectively, and after-tax wages will fall by 1.8% in 2013. These impacts are predicted to bleed into 2014 and beyond.

This report from E&Y is quite objective but primarily addresses economic effects on high-income taxpayers. Many other commentators, however, have equally dire predictions. Federal Reserve Chairman Ben Bernanke told the Senate on July 24 that if these tax hikes happen “recession would occur early next year and about one-and-a-quarter million fewer jobs would be created in 2013.”

Dr. Allen Sinai, economic forecaster and notable financial guru, thinks that these increases “would reduce growth to zero for years.” Former Congressional Budget Office Director Douglas Holtz-Eakin released a late July study opining that this tax-policy course would “cause a 6% drop in GDP, a 2% rise in unemployment, with 2.8 million more unemployed people.” According to the publication MarketWatch, 65% of global investors and 71% of U.S. survey respondents believe that “the fiscal cliff will cause significant uncertainty in markets for the rest of the year.”

With these tax increases are other expiring tax conditions that include: a payroll tax cut, the Child Tax Credit reduced from $1,000 to $500 per child, marriage penalty, alternative minimum tax, 100% business expensing and the American Opportunity Tax Credit. The new health-care-tax increases take effect in 2013 and continue growing each year. And all of this comes at a time when the business community is seeking some certainties in tax policies and honesty from legislators. Both political parties and most politicians “on the stump” want to see all this anxiety stifled until after the November elections.

As a directly affected American – personally and in whatever business role – a mandatory act for survival is that you clean the government houses, White House and both bodies of Congress. It’s time to push the reset button for America. IH

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