Sunday, April 15, 2012

Tax Day 2012, next year Taxmaggedon!

If your like many others, you abhor Tax Day.  Might even make you want to attend the annual Tax Cut Rally Saturday, April 28, 2012 at the State Capital.  The excessive spending in Washington, with the dramatic increase in the Administration bureaucracy (here and here) and the frivolous spending exemplified by the recent GSA scandal should put you off pretty strongly.

In fact such reactions just may have culminated in a new "honor" last year for Minneapolis which made it into the top 10 tax procrastinating cities in the country for the first time

Intuits Comments on Minneapolis first time showing in the top 10 procrastinator cities:
Minneapolis – (First timer!): So many theaters, so little time! The TwinCities must be too busy theater hopping instead of hopping to start those

But a more realistic/rational reason is likely the depths of distrust and dislike for our taxation system, and government arrogance as typified by the GSA scandal.  However if you didn't dislike the tax system before, or even if you did, you are in for a very rude awakening next year.  Unless the unlikely happens and President Obama and the Democratic Senate see the light on helping to fix the impending avalanche of taxes due to occur for 2013, when current law expires! 
An analysis shows:
If President Obama and Congress fail to act this year, an enormous, unprecedented tax increase will fall on American taxpayers starting on January 1, 2013. The Washington Post called the looming tax increase “Taxmageddon,”[1] and Federal Reserve chairman Ben Bernanke called it a “massive fiscal cliff.”[2]
Congress and President Obama have developed a penchant for waiting until the very last minute to act on pressing tax legislation. In 2010, they waited until late December to extend the expiring Bush tax cuts for two years. At the end of 2011, they waited again until late December to extend the expiring payroll tax holiday. They should break themselves of this bad habit.
Instead, Obama and Congress should remove the uncertainty clouding jobs and family finances by removing the threat of Taxmageddon now. Businesses, families, and investors need to know as soon as possible that this massive tax increase will not hit them as they awaken on New Year’s Day 2013.
The Democrats (incl Rep Betty McCollum) and their minions in the media have taken great efforts to paint the "Bush Tax Cuts" as a favor done for the wealthy.  The truth is a little different.  It greatly increased the progressiveness of the tax system and gave huge benefits to the lower income groups, virtually eliminating many from paying any income taxes at all.
The Bush tax cuts included a radical increase in the progressivity of the Tax Code.  "[T]he share of overall tax liabilities of the top 1% increased from 22.9% to 25.3%, as the result of a tax system which became more progressive since 2000."  Bush "cut the lowest income tax bracket by one-third and doubled the refundable child tax credit -- taking 10 million low-income families off the income tax rolls. In fact, the poorest 40 percent of households now pay zero income taxes, and many actually receive checks from Washington on April 15."

Our Congressional Representative of course does not agree with that and follows the Obama message of increasing taxation.  From Rep Betty McCollum's website:
Rep. Betty McCollum, a Democrat, has never voted to instate or extend the Bush tax cuts. She said she's not about to start now.

But isn't Rep McCollum and President Obama's message that they wouldn't increase taxes on middle and lower income people? Yet that is where the main impact of these cuts are:
Taxmageddon Hits the Middle Class: Taxmageddon falls primarily on middle- and low-income Americans. That’s because 60 percent of the Bush tax cuts went to middle and low-income taxpayers. The expiration of the patch on the Alternative Minimum Tax (AMT) will cause these taxpayers to pay a tax they were never supposed to be hit with, and the expiration of the payroll tax cut is a tax hike almost exclusively on middle- and low-income families. That’s just the direct impact. Americans at all income levels will feel the pain of Taxmageddon because it will slow job creation and wage growth.
The failures to address the lapsing "Bush Tax Cuts" accounts for about 34% of the Taxmageddon bill, but another tax that has been coming up year after year is the AMT, which accounts for an additional 25% of Taxmageddon.  The AMT was/is another misguided attempt to "tax the rich"
Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. (See Appendix for the AMT’s legislative history.) In inflation-adjusted terms, those 1967 incomes would be roughly $1.17 million in today’s dollars.

The AMT has the typical "unintended consequences" that have since become a threat to the middle class that requires an annual change in law to prevent
Another important tax break that's late in getting renewed -- assuming it does -- is the higher exemption from the dreaded alternative minimum tax. Originally envisioned as a way to capture at least some tax revenue from ultra-rich taxpayers who took advantage of other provisions to pay very little in taxes, the AMT now hits an estimated 3.8 million taxpayers. The number of people paying AMT would skyrocket by as much as 30 million if lawmakers don't get around to passing their annual "patch" in time -- and the extra tax bill could come to $8,000 for some of those taxpayers.

Sound familiar?  Its a lot like the motivations for the current discussions for the "Buffet Rule", which is targeted to affect wealthy taxpayers, except its namesake Warren Buffet. The Buffett Rule would affect only 2% of the 400,000 Americans making more than a million. That’s why it raises only $47 billion over the next decade.  Imagine an alternative of a 1% cut in each department in the federal government?  That would reduce spending by $33.6 billion.  And it would not create yet another impending unintended consequence for us to have to deal with in the future.  Hmmm, maybe revisiting the concepts like the fair tax, the flat tax, or possibly even the 999 plan (as long as its kept that way, er..., perhaps too much opportunity there for increasing the tax) don't sound so bad.

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