Introduction
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Unless something changes, Americans may be facing the largest
tax increase in history at the end of this year. Sadly, no members of
Congress will have to vote on this massive tax increase, and President
Obama will not have to sign it - it will happen automatically. It
happens at midnight on December 31, 2010 when the George W. Bush tax
cuts expire.
Back in 2001 when the Republicans controlled Congress,
President Bush was successful in pushing through major reductions in
income tax rates, capital gains and dividends, increased tax credits
and many other favorable tax provisions. The Democrats couldn't do
anything to stop it, but they did invoke the so-called "Byrd Rule"
which forced the Republicans to agree to a time limit for the new tax
cuts. Thus, the year 2010 was selected as the time the tax cuts would
expire, unless extended by a future Congress.
Many Americans believe that if the Bush tax cuts are allowed
to "sunset" at the end of this year, it will only affect wealthy
Americans. Yet the fact is that if all the Bush tax cuts expire at the
end of this year, it will mean higher tax rates for ALL
American taxpayers. Sadly, those in the lowest tax brackets get hit the
hardest (ie - the lowest 10% tax rate would jump 50% to 15%).
During the presidential campaign, candidate Barack Obama
pledged to repeal the tax cuts. "I want to eliminate the Bush
tax cuts," Obama told CNN's Wolf Blitzer in a May 2008
interview. Obama also said, in a June 2007 Democratic debate at
HowardUniversity, that repealing the Bush tax cuts would help pay for
universal health care and other social programs he envisioned. "The
Bush tax cuts -- people didn't need them, and they weren't even asking
for them, and that's why they need to be less, so that we can pay for
universal health care and other initiatives," Obama said.
Yet President Obama also promised that he would keep the Bush
tax cuts in place for those individuals making less than $200,000 and
couples making less than $250,000. This promise is badly broken if all
the Bush tax cuts sunset at the end of this year. As a result, some now
believe Obama will only raise taxes on those in the top two brackets.
However, Obama isn't exactly batting a thousand on keeping his
campaign promises. Add to that the Senate's failure to pass
cap-and-trade legislation, one of the major sources of funding for
Obama's spending programs, and you get the real possibility that more
than just the top two income tax brackets may see their taxes
increased. And remember, the tax cuts sunset automatically if Congress
does nothing, subjecting American taxpayers to the largest tax increase
in history.
This week, we're going to tackle the thorny issue of taxation
and the possibility that the Bush tax cuts will expire in their
entirety come year-end. We'll start out with the reprint of a December
Bloomberg article that helps to quantify the magnitude of the sunset
issue. While I don't realistically expect all of the tax cuts to
sunset, it will be interesting to see how Democrats reconcile their
stated desire to control deficits and their promise to shield the
middle class from tax increases.
Gary D. Halbert, ProFutures, Inc. and Halbert Wealth
Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the
following product or service.
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Commentary by Kevin Hassett
QUOTE:
Jan. 4 (Bloomberg) -- The U.S. enters 2010 the way many bad
movies end, by riding into the sunset.
Back in the early days of George W. Bush's administration,
opponents of his tax cuts were as helpless as Republicans have been
during the health-care debate. But a U.S. Senate rule named for
Democrat Robert Byrd allowed Bush's opponents one seeming victory. To
satisfy the Byrd rule, most of the tax cuts had to be considered
temporary, so they were written to be rescinded in the then-distant
year of 2010.
As bad as you might have felt on New Year's Day, the goal of
this column is to make you feel worse. Before reading further, you
might consider grabbing the Excedrin. The list of tax provisions set to
expire is long and significant.
Bush cut income tax rates, dividend tax rates and the capital
gains tax. He reduced the estate and gift taxes, expanded the earned
income tax credit, reduced the marriage penalty, expanded the child tax
credit and allowed small businesses to deduct a more generous share of
their expenses.
Those are just the big ones. An analysis
by Congress's Joint Committee on Taxation listed 113 tax provisions
expiring in 2009 or 2010.
If you are married, have kids, have income or run a small
business, your taxes are in play this year.
The question is, will Democrats let these sunsets happen? For
some of the provisions, the crystal ball seems clear. With others, it's
anybody's guess what might happen.
First let's look at income taxes. During the campaign,
President Barack Obama and most Democrats promised not to increase
taxes on taxpayers with incomes below $250,000. Even though the
Senate's health-care bill clearly violates that pledge, it doesn't
constitute income-tax legislation in the most literal sense. It seems
reasonable to expect that Democrats will otherwise try to honor Obama's
$250,000 floor.
That means the expanded earned income tax credit, the more
generous child credit and all of the tax-rate reductions that apply to
those with incomes below $250,000 are probably safe. Indeed, extensions
of those tax breaks were incorporated into Obama's long-term budget
outlook last year.
If your income is above $250,000, on the other hand, horrors
may await you. Major tax hikes appear inevitable, and the sunsets of
2010 are just the opening that Democrats need.
