TAX NEWS - June 2010

New taxes on the horizon

The good news is Congress is prepared to renew several tax cuts, prominent among them the Bush administration's tax relief for the middle class.

The bad news is Congress is also on the cusp of raising new taxes. Hints have been dropped of a high marginal rate going from 35 percent on income over $373,000 to 39.5 percent of income over $250,000.

One big deal here is the threshold of pay affected. Congress will be sliding down the income curve to impact more wage earners. Another report has the Medicare payroll tax deduction going from 1.45 percent of gross income to 2.35 percent for earners over $250,000.

But wait, there's more.

If you happen to be among this select group of taxpayers and you have income from dividends on your investments or capital gains on the sale of stock held more than one year, you are looking at a jump from a 15 percent tax to 39.5 percent.

Keep in mind that dividends suffer from double taxation as it is. Corporate income is taxed once, and then the distributions of cash dividends to shareholders are taxed yet again.

How important is all this as a source of revenue for the U.S. treasury? Consider dividends alone.

Exxon Mobil issued $8 billion in dividends last year. Using simplified assumptions we can say the government received $1.2 billion in tax revenue in 2009. Of course, we don't know how many Exxon shareholders earn more than $250,000, but we do know there are large institutional holdings of this stock.

If we assume $6 billion in dividends are distributed to high income earners, then the income from dividends to the government at least doubles to $2.4 billion. Multiply that by a gazillion companies paying dividends every year and this becomes real money.

A little perspective is probably in order, some historical ditties for your entertainment.

The first income tax in the U.S. was during the Civil War in 1861 - 3 percent on all income over $800. Taxes were levied again in the 1890s and permanently by ratification of the 16th Amendment in 1913. The highest marginal rate in the U.S. was 94 percent in 1944-1945. It applied to all income over $200,000, the equivalent of about $2.4 million today.

Tossing aside politics and the natural proclivity of many Americans to resent big government, lawmakers are between a rock and a hard place. In the smog of the financial crisis there are lower government collections at the state and federal levels and greater payouts because of 99-month unemployment benefits, stimulus plans, health care reform, two wars and bailouts.

It is urgent that the U.S. get its deficit and debt levels under control to lead by example and reassure global markets. It means taxpayers will have to come to the rescue yet again. Tax increases, which will hopefully take a substantial bite out of this problem, are unavoidable for almost all of us, not just those at $250,000.

It may mean slower economic growth with less discretionary income, which will exacerbate the glacial hiring process. But will states stand by and only drool, or will they also get in on the act? Watch for referendums on sales taxes and car tag fees this year.

I believe most Americans are willing to help in a time of crisis, but we are driven by abject fear of permanent tax increases, new spending and the institutionalization of ever more entitlements.

High taxes are the inevitable hallmark of every welfare state.

Consider Denmark, the country with the current highest tax rates and cradle-to-grave entitlements. The country taxes 63 percent of all incomes over $70,000. Most Western European countries have marginal personal income tax rates close to 50 percent or higher.

But that is for openers. Value added tax, or sales taxes, can reach 20-25 percent (except for food), and state or provincial taxes can add another 10-24 percent. The New York Times once cited a Danish software engineer searching for a job throughout the European Union but not in his native Denmark.

It makes one wonder if the EU isn't quietly in favor of the U.S. raising taxes permanently, in part to prevent a brain drain.