Future Taxes

President-elect Obama has promised that taxes will go up. While the target is rich companies and individuals, recent statements makes the who, when, and how much a little foggy. But not matter, what is interesting is that by doing nothing, things could be worse.

If nothing is done, on December 31, 2010, tax cuts enacted in 2001 and 2003 will mostly expire. Letting them expire will cause:

• The top tax rate for individuals to increase from 35% to 39.6%.
• Long-term capital gain taxes to rise from 15% to 20%.
• Taxes on qualified dividend income to go from 15% to as much as 39.6%.
• Estates over $1 million to be taxed (in 2009 only those over $3.5 million are) and the maximum rate increasing.
• Various tax credits for children, education, and other incentives to either be reduced or expire.

How you look at this depends on what side of the equation you view it from. Letting these tax cuts expire will cost the Treasury $1.5 trillion in lost revenue. Equally true is that it will cause a $1.5 trillion tax increase. If you are one of the ones the revenue will be spent on, you’ll be happy; if you are one of the ones the revenue is being taxed from, you won’t.

Raising taxes is needed to reduce the deficit and fund vital programs to help those who are suffering in this country. Raising taxes will negatively affect the economy and must be prevented in this time of recessionary peril.

In other words, the Obama administration is in a darned-if-you-do, darned-if-you-don’t dilemma.

Raising taxes has a trickle-down effect. Take away money from the upper-income earners and they have less to spend. If you are in an industry that caters to their wants, you will suffer. Don’t feel bad for the wealthy if they can’t afford a $250 per person dinner, a new $1 million boat, or a $25,000 ski vacation. Do feel bad for the cooks and waiters at that restaurant, the middle-class employees who build the boat, and the airline, hotel, and resort employees who provide vacation services.

The rich person still will eat well, drive around in their used boat, and take a nice vacation. Those that provided the products and services are unemployed. Just who exactly got hurt?

That’s not to say I think we should cater to the tax-needs of the wealthy. I am saying that we need to think about the effect a tax hike or reduction will have across the entire economy. Robbing the rich to give to the poor is considered noble. But the middle income earners are not immune from the effects. Recent indications from the Obama camp seem to show he understands this. But it isn’t the President that ultimately controls taxation—it’s Congress.

With the Democrats in charge of both Houses and the Executive Branch, there is less need for rhetoric and for pitting one group against another. Let your voice be heard by your elected officials. Don’t accept the one-liner of “tax the rich” as the way out of all our fiscal problems. Examine both sides of each revenue and spending proposal to see the total effect of any legislation.

Be diligent, for what seems like a noble cause in changing the direction of our economy can cause a train-wreck if the wrong switch is thrown.

Gary Silverman, CFP® is the owner of Personal Money Planning, a financial planning and investment management firm located in Wichita Falls. You may e-mail him at Gary@PersonalMoneyPlanning.com.