They call it Taxmaggedon or something like that. Whatever. It means that taxes are coming and it's going to be a whopper. Actually, it means taxes are coming back starting with the so-called Bush tax cuts which were enacted in 2001 and 2003 and expected to expire in 2010 only they didn't. The back-again tax cuts were extended for two years and new cuts, i.e. social security tax cuts were added.
So, in 2013 everyone's income taxes (all categories) go up; the child credit is cut in half; the so-called marriage penalty is restored; capital gains go up from 15 to 20 per cent; dividend taxes move from 15 per cent to ordinary tax rates; payroll tax rates restored, death tax reverts to old rates, the Alternate Minimum Tax is restored, and a new 3.8 tax on investments for those making over $200,000 individually or $250,000 as a couple is added on.
The tax changes come December 31, 2012 which is after the election and congress doesn't seem to want to tackle the issue before November. Income to the government will rise by nearly $500 billion or one-half a trillion. Put another way, if you earned $1,000,000 a year it would take you 500,000 years to spend it. The government will do it for you in one year without effort. At least you'll get some of it back some way, or maybe not. Hopefully, it would be used to reduce either the anticipated deficit at the end of the government's fiscal year, but you should know that the deficits have been about twice that each year. So, even with $500 billion new coming in, the overall debt will grow past $16 trillion and that's only if spending is flat, something that isn't likely to occur.
OK. Don't let the taxes expire except for the rich. Problem. There aren't enough rich to make up the difference. One of the problems is that those Bush cuts resulted in an estimated 51 per cent of the population paying no taxes. That's up from 20 per cent in the 1960s and 1970s. Interestingly, the unpayer rate was 49.4 in 1940, but dropped to 31.6 in 1941 when lower rates were raised.
Of course, the non-payers do pay all other taxes beside the earned income tax, including the social security tax which is their own government pension plan. Incidentally, the SS tax cuts that have been in effect could result in less money in the pot for each individual when it comes to retirement.
But, back to the non-payers: how does it happen? A CPA firm explained it this way: a family earning $50,000 a year gets a personal exemption of $3,700 each plus a standard deduction of $11,600 bringing the taxable rate down to $23,600 and the tax bill is $2,800. The child credit of $1,000 for kids under 17 drop the tax bill to $800 and then earned income tax credits for low incomer reduce that to zero. For others, about half, actually get a check from the government because their credits exceed income.
Now, this is the mess Congress is going to address in the almost two months between the elections and the start of the year. Worse, moving the figures around to get both fairness and income doesn't work very well, certainly not politically. What is needed is a new tax code to get rid of the 56,000 pages (maybe its more) of exemptions and exceptions that have been attached to the code since 1913. That's not likely to occur quickly. So, we'll probably get a hybrid model of the hybrid model of the hybrid models that we've been using.
Oh, well. If we know government is going to spend it all anyway we should get it redistributed back minus the "administrative" fee that goes to the government bureaucracy. This is the real trickle-down theory, but , if true, it does make you wonder why Greece and Spain and Italy are going bankrupt.