When it comes to taxes, Washington, D.C., is now experiencing the quiet before the storm of the century. But, starting in early2013, American families and small employers will face a list of tax increases so large that they cannot be ignored in this election season. Adding together data from the non-partisan Congressional Budget Office (CBO), it’s reasonable to say that these combined tax hikes will total $6 trillion to $7 trillion over the next decade.
There’s much talk about the “expiration of the Bush tax cuts,” but that’s a misnomer. The 2001 and 2003 tax relief has been extended by Congresses controlled by both parties, and extensions signed into law by presidents of both parties—notably including President Obama himself. This list encompasses more than just that basket of potential tax hikes, however. There are plenty more in ObamaCare and Social Security.
President Obama talks a lot about raising taxes on “millionaires and billionaires,” but most of the tax hikes mentioned below fall on households making $250,000 per year or less. Even raising the very top rate, something Obama has been pushing during his entire public life, would be a tax increase on small employers and families with taxable income of around $400,000 in 2013. This is trickle-down taxation at work, and it’s coming to a middle income family near you.
President Barack Obama will have to go on record: Is he for this tsunami of tax hikes, or is he against them?
Personal income and small employer tax hikes
The first series of tax hikes will hit personal income tax rates. Because many small employers pay business taxation at these rates, this is also a tax rate hike on small businesses. The lowest personal rate will rise from 10 percent to 15 percent and the highest rate will go up from 35 percent to 39.6 percent. This means that every American with an income tax liability is scheduled to see a rise in taxes.
The majority of small employer profits face taxation at the top marginal tax rate. That means that the top personal rate is actually a proxy for the small business tax rate in America. That rate will rise from 35 percent to 39.6 percent. Thanks to a provision in the jobs-killing ObamaCare law, most small employer profits will face a Medicare tax rate of 3.8 percent, pushing the total small business rate over the 40 percent mark.
Higher taxes on families and seniors
Families with children will see higher taxes. The “marriage penalty” (higher taxes for a cohabitating couple than an identical married couple) will return, hitting the first dollar of taxable income. The child tax credit will be cut in half, from $1000 to $500 per child. For seniors, the top effective marginal tax rate on Social Security benefits will rise from almost 30 percent in 2012 to almost 34 percent in 2013.
Social Security taxes themselves will also rise. For 2011 and 2012, Congress has put in place a temporary two percentage point reduction in the FICA tax rate. If this is not renewed or replaced, any worker earning a paycheck or a small employer earning income will pay more in taxes. For someone earning $50,000 per year, that’s an additional $1,000 that will have to be paid toward the effectively insolvent Social Security system.
Higher taxes on savers
Savers and investors are especially hard-hit by the scheduled tax hikes. The top rate on long-term capital gains is set to rise from 15 percent to 23.8 percent. If you receive dividends, the top rate on this income will rise from 15 percent to 43.4 percent. The Tax Foundation reports that 70 percent of taxpayers over age 55 reported dividend income, earning 71 percent of the total dividends in America. A tax hike on dividends is another tax hike on seniors.
Even if your retirement savings are all in traditional pensions, 401(k) plans and IRAs, the financial markets will have to price in these higher taxes, shrinking everyone’s nest egg. Taxes are a cost like any other, and markets have to price in the cost of higher taxes.
Death tax on the middle class
The death tax is set to go up, both under current law and in President Obama’s budget. Today, the death tax rate is 35 percent and there is a “standard deduction” of $5 million ($10 million for married couples and widows). In 2013, the rate will rise to an astonishing 55 percent, and the deduction will fall to only $1 million. Even under President Obama’s budget, the rate will rise to 45 percent and the deduction falls to $3.5 million. For thousands of families, death will once again become a very taxable event.
ObamaCare tax hikes
What about ObamaCare? There were 20 new or higher taxes in the jobs-killing ObamaCare law, at least seven of which fall on households making less than $250,000 annually. This latter point clearly breaks a promise made by candidate Obama, who pledged in 2008 that he would not raise “any form” of taxes on families making less than this level of income. He broke that promise a mere 16 days into his presidency when he signed into law a tobacco tax hike (the average smoker earns less than $40,000 per year, according to industry estimates).
The jobs-killing ObamaCare law’s tax hikes have already partially taken effect. The 10 percent “tanning tax” has been on the books for two years. Since 2011, we haven’t been able to use our health savings accounts (HSAs) or flexible spending accounts (FSAs) to purchase non-prescription, over-the-counter medicines (the “medicine cabinet tax”). Those under 65 taking non-medical withdrawals from an HSA now face a surtax of 20 percent for doing so.
There is a new 3.8 percentage point “surtax” on investment income in 2013 that has already been alluded to. This will apply to interest, dividends, capital gains, annuities, rent, royalties and investor income in partnerships and Subchapter-S corporations for households making more than $250,000. Connected to this, the top FICA tax rate for Medicare Part A will rise from 2.9 percent to 3.8 percent for these households. Together, this is a tax rate hike on all small employer profits.
If you have an FSA at work, and you use it for large medical expenses (like special needs education, durable medical equipment, reconstructive surgery, etc.), you will find yourself locked out in 2013. Currently unlimited by tax law, there will be a new $2,500 cap on FSA deferrals. This is a cruel tax increase on those who can least afford it—those with high medical bills.
Connected to this is an increase in the “haircut” that must be applied to medical itemized deductions. Under 2012 rules, itemized medical deductions must be reduced by 7.5 percent of adjusted gross income (AGI). In 2013, this will increase to 10 percent of AGI. This will be a tax hike for seniors with high medical bills and those dealing with the high out-of-pocket costs of chronic illness or long-term care.
In 2013, there will be inaugurated a new excise tax on medical device manufacturers, driving up the cost of every wheelchair, pacemaker and hospital bed. It’s also a jobs killer, since America’s 6,000 medical device companies employ 360,000 people.
This doesn’t even account for the individual and employer mandates in ObamaCare (which take effect in 2014) or the new excise tax on high-cost (“Cadillac”) health insurance plans (which takes effect in 2018).
Obama’s ‘Buffett rule’ is another AMT
In addition, President Obama has proposed new taxes beyond those already scheduled. He wants a “Buffett Rule” to ensure that those making more than $1 million pay a tax rate of at least 30 percent. This is on top of the dreaded “alternative minimum tax” (AMT), which is scheduled to rise from 4 million to 30 million victims in 2013.
It’s unclear whether the foregoing laundry list of tax hikes will achieve the 30 percent tax rate goal of this new “Buffett Rule” AMT, or if President Obama still wants our most productive citizens to pay an even “fairer” share of their income in taxes.
That’s still not the end of it. President Obama wants to raise taxes on energy companies, driving up the cost of electricity and gasoline for every family and small employer in America. For larger employers who earn profits overseas, he wants to make it more difficult to bring that money back to America by double-taxing it, a suicidal refusal to bring capital and jobs home. The research and development tax credit, which manufacturing employers depend on to cope with our world’s-highest 35 percent federal corporate income tax rate, has already expired in 2012 along with a host of other business and family tax relief.
The list goes on and on. During this election season, President Obama needs to answer this question: “why do you want to raise taxes in every imaginable way when our economy is weak and millions of Americans are looking for jobs?”