Taxes on the way

Without revision we're headed for big increases in taxes at all levels except the nearly 50% who pay no taxes now!

Reversion to the Clinton tax hikes: Time to rethink what our government has become

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POSTED AT 8:03 PM ON NOVEMBER 14, 2011 BY J.E. DYER 
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As we read more and more about the US federal government handing out money – borrowed-against-our-future money – to the private enterprises of Obama’s campaign donors, it is heart-warming to remember that the tax code is scheduled to revert on 1 January 2013* to what it was under Bill Clinton.

This means that unless the Super Committee comes to an agreement to avert it, you are almost guaranteed to have a larger federal income tax bill after next year.

Money-manager-types explain, each time we reach this precipice, that going back to the Clinton tax code means virtually everyone who pays now will pay more.  It also means some who don’t currently pay net federal income tax will have a balance owed in 2013 after exemptions.

It’s not just rate increases for the “rich.”  The 10% bracket goes away, with the lowest rate reverting to 15%; the child tax exemption goes from $1000 per child back to $500; the “marriage penalty” comes back in terms of personal exemptions – and those are just the changes that will be felt by the most people.  Taxes on dividend income will go up as well, and all exemptions will be phased out as income rises (which will hit the small-business proprietors and professionals whose activities with their own money make an outsize contribution to economic growth and prosperity – not to mention dealing a blow to charities).

Bob Jennings at Fox Business ran some numbers for a young couple with two kids and combined income of $100,000.  (H/t: Lonely Conservative.)  Their tax bill would go up by nearly $3600 between 2012 and 2013, or about $300 a month.  And that’s just federal income tax:  they’re also paying property taxes (they have a mortgage), probably state income tax as well, and sales taxes and special excise taxes (e.g., federal gas tax) – plus they’re sending 13% of each of their earned incomes to Social Security and Medicare.

The young couple will certainly feel the loss of $300 a month.  Estimates of tax bill increases suggest that they will be felt down to incomes in the upper $20,000s range, by typical single filers.  (With exemptions, multi-person households have lower tax bills at the same or higher incomes.)  Those most likely to be single filers with incomes in this range are either seniors on fixed incomes, or young people just starting out.  For either demographic, an increased tax bite of even $20-30 a month makes a difference.  That amount can easily equal the total monthly fees assessed on, say, utility bills and banking.  Few people in this income bracket can say they wouldn’t miss the amount.

For a household earning $150,000 a year, the tax bill increase will run to $6,000, $8,000 or more, depending on the household.  People with incomes in this range know that the loss of $500-700 a month will make a significant difference.  Assuming they’ve already cut way back on consumption, they’ll have to start cutting back on savings and investment.  That will do the opposite of create jobs and encourage economic growth.  (It will also minimize the additional revenues from increasing the tax rate on dividends.)

The higher you go in the income brackets, the more likely filers will be to simply take less individual income.  Why expose it to the tax man?  The discretion wealthier taxpayers have over their assets disappears, disproportionately with each increase in current income.  It’s not worth it on the margin to accept the greater tax exposure.

These filers will park a greater portion of their assets in low-tax-exposure instruments rather than taking as much current income or capital gains as they do today, and taking economically-productive risks with it.  This removes some amount of ready capital from circulation, leaving it latent:  too expensive to take out and use.  If there were not relatively tax-advantaged options for using it abroad, this might make less of a difference.  But there are.  For America, increasing tax rates on our capital sump will drive jobs and economic growth elsewhere (especially with the costs of regulation on a dramatic upswing in the US).

We can hope the tax increase won’t happen.  The threat was averted for 2011, after all.  But it ought to be especially galling for taxpayers, in the wake of the Solyndra revelations – and the now seemingly endless parade of crony beneficiaries of the Obama administration – to contemplate the very real pain it will inflict on their recession-shocked households if the Clinton tax code comes back.

Americans are not undertaxed.  Government at every level is, rather, overspent – and the people’s lives and commercial activities are stupendously overregulated, which discourages economic activity – as well as income mobility – by raising the cost of literally everything.

Before we collect one additional penny in taxes from anyone, we need to cut spending and regulation.  Start with the federal grants to Obama’s political cronies; the current prohibitions on drilling for oil and gas; and 100% of the discretionary activities of the Environmental Protection Agency, including the new air quality standards set to go into effect on 1 January.  Whether you want to add a new regulation or modify an old one, you should have to fight in Congress for every single change, using your own money, not the people’s – and lose your battles if  you can’t get the votes.

The basis of government has gone badly awry in America.  The bottom line is that the taxpayers should not have to accept pain so that we can fork over more to keep funding it on its current basis. Michael Bloomberg is wrong about that.  Government is what has gone wrong, and it’s government that needs to change.

* Aw, heck.  I meant the tax code reverts to Clinton’s in 2013, as several alert readers have pointed out.  No excuse; brain flatulence.

J.E. Dyer’s articles have appeared at The Green Room, Commentary’s “contentions,” Patheos, The Weekly Standard online, and her own blog, The Optimistic Conservative.