"Not One Single Dime"

Today Congress is debating whether the Bush Tax Cuts should expire or be renewed. The fact that this is being debated at all amazes me. The worst thing you can do during a recession is raise taxes. Everyone knows that; even the most uneducated among us.

The second worst thing you can do is try to spend your way out of a recession. But of course we know the Obama Administration has already attempted that. And, as expected, it has failed miserably regardless of what the President and Mr. Geithner are saying at every opportunity.

During the Presidential campaign in Dover, New Hampshire on September 12, 2008, then candidate Obama stated the following:

"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. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.... You will not see any of your taxes increase one single dime."

This sounds strikingly similar to George Bush’s claim in 1988: “Read my lips, no new taxes.” We all know he broke that promise. We all know he failed to get reelected. Hopefully, the same will happen here. When Obama allows the George W. Bush tax cuts to expire on December 31, 2010, it should be the final nail in the coffin for hope and change. All of us who are hoping for change may now actually get what we want.

It should also be noted for the record that President Obama has already broken this promise once before. The Health Care Reform Act contains a number of tax increases that originally were called penalties. After much chagrin, the Obama Administration finally had to admit these were taxes not penalties. Since that has been opined upon to death by commentators, I will not dwell on it here. Just suffice it to say he has already increased taxes on the lower and middle classes.

This article is primarily about the Bush tax cuts. And if they are allowed to expire, beginning in 2011, your taxes will increase by much more than one single dime as Obama stated. The raise will be much, much greater. Here's why:

Ryan Ellis wrote an article published July 1, 2010 on a website called Americans for Tax Reform. Mr. Ellis goes into some detail regarding what lays ahead if Obama and the Democrats get their way and allow the tax increase which, by the way, will be the largest tax increase in American history. Voters should arm themselves with this information now in order to make intelligent choices in the voting booth in November. By the way, it may not help regardless of who gets elected in November because a lame duck Democratic Congress with an angry Leftist President may be the most dangerous thing this country has ever seen. Beware mid-November through January!

Here are some facts on the tax increase scheduled for January 1, 2010:

• Personal income tax rates will rise...

- The 10% bracket will rise to 15%

- The 25% bracket will rise to 28%

- The 28% bracket will rise to 31%

- The 33% bracket will rise to 36%

- The 35% bracket will rise to 39.6%

• 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 thereby bringing back the so called marriage penalty.

• The dependent care and adoption credits will be cut.

• There will be a 55 percent top death tax rate on estates over $1 million. (If this is allowed to happen, then George Steinbrenner saved his heirs almost half a billion dollars by dying this year).

• The capital gains tax will rise from 15 percent to 20 percent.

• The marginal rate on dividends will rise from 15 percent to 39.6 percent

• Health savings (HSA) and flexible spending accounts (FSA) can no longer be used to purchase non-prescription, over-the-counter medicines.

• A $2,500 cap on flexible spending accounts FSAs will be added.

• Tax on non-medical early withdrawals from an HSA will double to 20 percent.

• Small businesses will no longer be able to expense up to $250,000 in capital purchases. Instead, the allowance will be reduced by 90% to only $25,000.

• Large business will have their expense deductions slashed by 50%.

• The “research and experimentation" tax credit will be eliminated,

• The deduction for tuition and fees will be eliminated.

• Teachers will no longer be able to deduct classroom expenses.

• The student loan interest deduction will be eliminated.

• Charitable contributions from IRAs will be eliminated. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA.

To make matters worse, the Alternative Minimum Tax (AMT) will now be levied on at least 28 million families. That's a seven-fold increase from last year when it was levied on 4 million. This “AMT” disallows many deductions and exemptions such as state and local income, sales tax, property tax, accelerated depreciation, medical expenses and other tax preference items such as Intangible Drilling Costs. Instead, it sets a minimum tax rate of either 26% or 28%.

And because the AMT is not indexed to inflation, the number of households affected by this tax will dramatically increase over time. This was predicted by the Congressional Budget Office way back on April 15th, 2004, when it issued this statement:

"Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax."

In short, the AMT disallows deductions otherwise available under standard IRS rules, and is based upon a very complex set of criterions.

If these changes are allowed to happen, it will be disastrous for the economy. Small business will be stymied. Spending by private business will be substantially lowered or cease completely. What does that mean? Unemployment will go up. We will not only have a double dip recession, we will probably have an economy worse than that of the Great Depression.

Right now, every economic indicator shows that the economy is barely holding onto the ledge. Anything that would cause investors and/or private sector business owners to stop spending may be the straw that breaks the camel’s back. These tax increases contain a number of such straws.

For example, if you raise the Capital Gains and Dividend Tax Rate, you will be directly hitting investment. Investment is what drives the economy. For every dollar an investor pays in taxes, it is one potential dollar that will not be used to finance another company or to increase capital expenditures in an existing company. It also makes less dollars available to hire another few employees should the need arise. It also takes the incentive away to make more money. Remember the Lauffer Curve whether you agree with it or not.

The same is true if you increase the write-off period on big ticket items. If a company is permitted to expense $250,000 in capital expenditures each year, it may be more inclined to make purchases of big-ticket items than if it can only expense $25,000 per year. Anything over $25,000 would now have to be capitalized and charged off over a number of years. Private sector business will no longer make those purchases or they will decrease dramatically. Look at what happened after the Homebuyer Credit and Cash for Clunkers ended. It would be the same thing. Jobs will be lost and/or not created.

Middle Class homes will not make additional purchases as well. If you cause an average family to pay an additional 5% in taxes, that is 5% less discretionary income to keep the economy moving. Plus, if people lose faith in the economy, more money goes into savings which is also dangerous because money saved is not money spent. Personal savings rates are already up so this is already happening.

In addition, we are on the verge of a deflationary spiral which is considered a disaster to an economy in the sense the people do not tend to spend money when they think prices are going down because they are waiting for price decreases. Manufactures, then lower prices to stimulate purchases. This does not work because every price decrease is met with more expectations on the buyers for more price decreases. The last time this happened in the United States was in the 1930’s. We have now had three straight months of decreases in the Consumer Price Index. At what point are we officially in such a spiral?

When you couple the tax increases set for January, 2010 with the possibility of deflation, we are on the precipice of a disaster the likes of which this country has never seen. Also, by the way, does the printing of fiat money in the manner that the government has in the past 18 months scare anyone? Shouldn’t we be in the midst of the greatest inflation this country has ever seen? This is a doomsday scenario waiting to happen.

In closing, it is my opinion that this tax increase cannot be permitted. It is not the way to close the budget gap. Congress must find other ways to do so. They cannot rely on more taxes. They must limit the size of government by necessity even if that is not what they want. Governor Schwarzenegger has had to do it in California and it has made him extremely unpopular. Sometimes the tough decisions are the necessary ones.

Congress must reign in spending. Keep the tax cuts in place for another 4-5 years or make them permanent. Give the economy a chance to cycle its way out of this depression. Do not make it any worse.

Maybe we can start by eliminating some government programs. Maybe the Department of Energy which has proved useless should cease to exist? Maybe the Health Care bill should be left unfunded? There are many other ways to curb the spending even to the extent of privatizing the Post Office.

A tax increase to allow uncontrolled spending to continue is not the answer, especially in light of the fact that President Obama will be breaking one his most solemn campaign promises. Of course with him that does not seem to be an issue. He is breaking promises ever day he is in office. Maybe that is why his approval rating currently stands at about forty-three percent.

© 2010 by Craig Covello and Frank DeMartini. Used with permission. All rights reserved.