Taxes are set to increase by more than $4,000 a year for the average family in 2013 — unless Congress acts. This is based on the average family income of about $70k. For poorer working families making about $22k per year, taxes will increase $1200.
This coming tax increase was dubbed by the Washington Post “Taxmageddon,” a combination of “tax” and the end-of-times Biblical term “Armegeddon.” (See, the Bible is useful for all kinds of things!). The tax increases will not be the end of the world, but they will be painful and will hurt the poor as well as the upper middle class, probably causing some serious pain for everybody reading this blog. The rich will find ways to move their money around to mostly avoid the tax increases, just as they do today.
Let’s be clear about the sources of the tax increases.
As you can see, most of the tax increases come from three different areas, the end of the payroll tax holiday (signed by Pres. Obama), the end of the Bush-Obama tax cuts (signed by both presidents) and the annual threat of the end of the AMT patch (a leftover from the 1960s, if you can believe it). But there are also tax hikes coming because of Obamacare and the end of the 2009 stimulus tax cuts to consider.
This is not just about the much-reviled “Bush tax cuts.” I would like to take a minute to address those tax cuts, because the media has successfully brainwashed people into thinking that the Bush tax cuts are all about giving free money to the rich. In fact, the majority of tax cuts from the Bush tax cuts affect the middle class and the working class. The Bush tax cuts created a new tax bracket for the lower-middle class, ended the marriage penalty and upped the exemption for children. In fact, more than 75 percent of the revenue “lost” from the Bush tax cuts involves families making less than $250k per year. So “getting rid of the Bush tax cuts,” even for the rich, will not get rid of the deficit and in fact will raise only about $70 billion per year, which is not much compared to the $1.3 trillion deficit.
Here is a reminder of what the Bush-Obama tax cuts did:
In any case, all of these tax increases come to nearly $500 billion a year. Some of you are saying, “great, this helps get rid of the deficit.” The problem is that most people reading this will indeed pay a lot more in taxes, but the richest people will find ways of avoiding the tax. There is no way that, over the long term, the tax increases will consistently raise that much money because people change their behavior when faced with more taxes. Some people will stop working, others will change jobs to take advantage of the inevitable loopholes or start their own businesses. The reality is that no matter how much you try to tax people, the overall take of taxes has remained amazingly consistent over the years, between 15 and 20 percent of GDP. Yes, revenue intake is lower now than in the boom years, but this is primarily a cause of a recessionary economy — when the economy is suffering, people make less money and pay lower taxes. But the bottom line is this: you cannot raise taxes too high because people will simply change their behavior and the predicted revenue will not come in.
The reality is that our real problem is spending.
As you can see, we are spending more as a percentage of the economy than any time since World War II. This is our real problem.
So, what should be done about “taxmegeddon?” In the short term, Congress should pass all of the tax breaks again for another two years. In the meantime, Congress should adopt the Ron Paul budget and cut $1 trillion from 2013 spending, eliminating entire federal departments and dramatically cutting military spending. I discuss the Ron Paul budget here.
To be clear, this is the only solution that involves real long-term growth without you giving more and more of your money to an out-of-control government.
What will happen? Congress will not act on Taxmegeddon until after the November elections. I am betting that Mitt Romney will win and that the Republicans will have a small majority in the Senate and maintain the existing majority in the House. Congress will either extend most of the tax cuts in December or when the new Congress is inaugurated. Congress will make minimal cuts in the budget, so we will continue to maintain deficits near $1 trillion in the short term. In the long term, things get even worse because of Romney’s big spending military policy and the coming chaos of spending for Social Security and Medicare. I am hoping that as a country we will collectively wake up and make significant cuts in spending. It is our only chance.