Democrats want Americans to believe that by letting tax rates rise they have discovered religion as deficit cutters. But after a two-year assault on the federal trough in which Congress passed the notoriously wasteful stimulus and added a new health care entitlement, few Americans are even bothering to listen. In reality, the harm this tax increase will inflict on jobs and gross domestic product will strongly outweigh any presumed boost in tax revenues.
American businesses are sitting on top of a record $2 trillion in cash — money that could be spent hiring more workers, funding new projects or paying out dividends to investors. But right now these dollars remain stuck on the sidelines.
Already grappling with weak demand for goods and services, businesses of all sizes have five main costs and expenses that impact their bottom lines. Thanks to the agenda in Washington, all are going up, turning the White House’s much-touted “Recovery Summer” into the “Summer of Uncertainty.” Here’s a look:
•Taxes will jump next year on everything from ordinary income, capital gains, dividends and estates. And with our national debt soaring, the prospect of even more tax increases in the future seems more likely.
•Health-care costs are growing as a result of Obamacare’s mandates and inflationary impact on premiums.
•Energy costs remain in limbo as leading Democrats, led by Sen. John Kerry, float the idea of passing cap-and-trade during the lame-duck session of Congress.
•Credit is becoming more expensive and is increasingly out of reach for most small businesses, partly because the 2,300-plus page financial regulatory bill encourages banks to horde their capital rather than lend it.
•Labor costs also threaten to climb higher as labor unions dig in their heels and gear up for another push to pass card check.
Critics repeatedly have accused Obama of violating that pledge and with the Bush tax cuts set to expire unless Congress acts before Jan. 1, a look back at the administration’s statements shows a gradual softening in their tax rhetoric. The president in February went so far as to say he’s “agnostic” on the issue in the context of closing the deficit. The White House, though, is still pressing for a continuation of the Bush tax cuts for the middle class.
In just 120 days, the largest tax hikes in the history of America will take effect. They will 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, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:
Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). 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. The full list of marginal rate hikes is below:
- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%
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 $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care tax credit 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. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.
Higher tax rates on savers and investors. The top capital gains tax will rise from 15 percent this year to 20 percent in 2011. The top dividends tax rate 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: Obamacare
There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:
The Tanning Tax. This went into effect on July 1st of this year. It imposes a new, 10% excise tax on getting a tan at a tanning salon. There is no exemption for tanners making less than $250,000 per year.
The “Medicine Cabinet Tax” Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).
The HSA Withdrawal Tax Hike. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.
Brand Name Drug Tax. Starting next year, there will be a multi-billion dollar tax assessment imposed on name-brand drug manufacturers. This tax, like all excise taxes, will raise the price of medicine, hurting everyone.
Economic Substance Doctrine. The IRS is now empowered to disallow perfectly-legal tax deductions and maneuvers merely because it judges that the deduction or action lacks “economic substance.” This is obviously an arbitrary empowerment of IRS agents.
Employer Reporting of Health Insurance Costs on a W-2. This will start for W-2s in the 2011 tax year. While not a tax increase in itself, it makes it very easy for Congress to tax employer-provided healthcare benefits later.
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. 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. Until this year, a retired person with an IRA could 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.
The following is a review of the evolution of the administration’s tax platform:
Sept. 12, 2008: Speaking before a New Hampshire crowd, Obama promised to shield middle-class families from a tax increase.
“And I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase,” he said. “Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”
June 28, 2009: In an interview on ABC’s “This Week,” White House senior adviser David Axelrod was asked whether Obama would veto any health care bill with a tax increase for those making less than $250,000 a year. Axelrod said Obama’s plan would keep with his tax promise but he would not directly answer the question, which concerned a Senate proposal to cap deductions.
“One of the problems we’ve had in this town is that people draw lines in the sand and they stop talking to each other. And you don’t get anything done,” he said “(Obama) is very cognizant of protecting people — middle-class people, hard-working people who are trying to get along in a very difficult economy. And he will continue to represent them in these talks. But they’re also dealing with punishing health care costs, and that’s something that we have to deal with.”
June 29, 2009: White House Press Secretary Robert Gibbs declined to clarify Axelrod’s comments when asked repeatedly about them at the press briefing.
“The good news is we’re making significant progress, and all those people are still sitting at the table. We haven’t drawn a lot of bright lines,” Gibbs said. “We’re going to allow that process to continue … in order to make progress.”
Aug. 2, 2009: In an interview on “This Week,” Treasury Secretary Tim Geithner was asked about Obama’s tax pledge and whether he’d be able to keep it in light of the need to reduce the deficit.
“We can’t make these judgments yet about what exactly it’s going to take and we’re going to get there,” Geithner said. “I think what the country needs to do is understand we’re going to have to do what it takes, we’re going to do what’s necessary.”
Aug. 2, 2009: In an interview on NBC’s “Meet the Press,” White House economic adviser Larry Summers also left the door open on the tax question.
“There is a lot that can happen over time,” Summers said.”It is never a good idea to absolutely rule things out, no matter what.”
Aug. 3, 2009: In damage control mode, Gibbs restated and stood by Obama’s tax pledge when asked about Summers’ and Geithner’s comments.
“The president’s clear commitment is not to raise taxes on those making less than $250,000 a year,” Gibbs said. “I am reiterating the president’s clear commitment in the clearest terms possible, that he’s not raising taxes on those who make less than $250,000 a year.”
Sept. 20, 2009: Obama got in a spat with host George Stephanopoulos during an interview on “This Week” Stephanopoulos suggested that the proposed fines against those who don’t purchase health insurance as required by the new health care package amount to a tax on the middle class. Obama disputed that point.
“It’s still a tax increase,” Stephanopoulos said.
“No. That’s not true,” said Obama. “For us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase. … You can’t just make up that language and decide that that’s called a tax increase.”
Stephanopoulos then read aloud the dictionary definition of “tax” to the president of the United States.
Obama responded: “George, the fact that you looked up Merriam’s Dictionary, the definition of tax increase, indicates to me that you’re stretching a little bit right now.”
“But you reject that it’s a tax increase?” the host asked.
“I absolutely reject that notion,” Obama said.
Nov. 1, 2009: In another “This Week” interview, senior adviser Valerie Jarrett was asked whether Obama would veto any health care package that violates the tax pledge, in reference to one proposal that would tax high-value insurance plans.
“Let’s hold off prejudging what it’s going to do. But the president has been clear, he does not want to impose a tax on the middle class,” she said.
Pressed again, Jarrett said: “What I’m saying is that he is confident that a bill that’s going to be passed is going to be consistent with his parameters.”
Feb. 9, 2010: Obama said in an interview with Bloomberg BusinessWeek that he could be “agnostic” on raising middle-class taxes. He was referring to a newly formed commission tasked with examining ways to bring down the deficit.
“The whole point of it is to make sure that all ideas are on the table,” Obama said. “So what I want to do is to be completely agnostic, in terms of solutions.”
He added: “What I can’t do is to set the thing up where a whole bunch of things are off the table. … Some would say we can’t look at entitlements. There are going to be some that say we can’t look at taxes, and pretty soon, you just can’t solve the problem.”
July 27, 2010: Gibbs said at his daily press briefing that the issue of the Bush tax cuts came up during a meeting with congressional leaders. He repeated Obama’s pledge.
“The president said that, as he had committed to in the campaign, he would not allow the tax cuts for the middle class to expire,” Gibbs said. He explained that Obama is not arguing for extending the Bush tax cuts for the wealthy but wants the middle-class cuts to be “preserved.”
“I believe the president believes that raising taxes on the middle class during this economic time would not make a lot of economic sense,” he said. “And I think if you go back to the campaign, the president made that pledge not simply to make that pledge, but to make that pledge because for years and years and years we’d watched jobs being shed, wages either flat or declining, and that now is neither the time nor the place to raise taxes on them.”
Sept. 8, 2010: As the debate over extending the Bush tax cuts heated up, Obama used an economic speech in Ohio to accuse Republicans of holding the middle class “hostage” by demanding an extension of all the Bush tax cuts.
“Now, I believe we ought to make the tax cuts for the middle class permanent,” Obama said. “But the Republican leader of the House doesn’t want to stop there. Make no mistake — He and his party believe we should also give a permanent tax cut to the wealthiest 2 percent of Americans. … We should not hold middle-class tax cuts hostage any longer. We are ready, this week, if they want, to give tax cuts to every American making $250,000 or less.”
Sept. 9, 2010: Obama was asked during an ABC News interview whether he would support a two-year extension of all the Bush tax cuts — representing a compromise with Republicans. Without answering directly, the president suggested that would not be a “smart thing” for the economy. Asked again, Obama said the reason the tax cut package hasn’t passed is because “we haven’t seen compromise from the other side.”
The president then repeatedly declined to answer the question of whether he would veto such a short-term extension of all tax cuts.
Sept. 30, 2010: Congress adjourned without a vote on the Bush tax cuts. The same day, Gibbs said at his daily press briefing that, even though dozens of House Democrats pushed for an across-the-board extension, the reason the House never took up a tax cut bill was “because the Republicans said they weren’t going to do it.”
The Heritage Foundation Center for Data Analysis has estimated the impacts of the Obama tax hikes and found they would: 1) decrease inflation-adjusted gross domestic product (GDP) by $1.1 trillion by 2020; 2) decrease business investment by $33 billion a year; 3) decrease personal savings by $38 billion in 2011 alone; 4) decrease consumer spending by $706 billion through 2020; and 5) kill an average of 693,000 jobs a year through 2020.
The CDA has even broken down these impacts by state and congressional district. You can find the state-by-state and district-by-district results here (in the right hand column). West Virginians will see their individual income taxes rise by $1.6 billion. Nevadans will lose $2,697 per household in disposable income. And Wisconsin will lose 14,083 jobs annually. The stakes are high. Click through and find out How the Obama Tax Hikes Affect You.
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