Are Higher Taxes Coming?

Before we take a look at Obama’s specific proposals, let’s take a look at where taxes stand historically.

 When Congress imposed the first tax in 1913, the top rate was just 7%. That top rate soared to 73% after World War One, dropped to 24% in 1929 and 25% for the first two years of the Great Depression, then climbed as high as 92% in the Eisenhower administration. Since then it has dropped as low as 31% during the first Bush administration, 39.6% during the Clinton years, and back down to 35% from 2003 until today.

 Obama says his goal is to cut taxes for families making under $250,000 and bring taxes down to 18.2% of gross domestic product. That would put them at the same level that prevailed under Ronald Reagan. And in fact, many of his increases, such as his new top rates on dividends and capital gains, would still leave rates on that income lower than they were under Reagan. But that goal may be harder to accomplish now, with the economy in crisis, than it would have been with the economy in healthier shape back when Obama introduced his plan.

  FLAT TAX

How many of you are familiar with proposals for a flat tax? It sounds like a great idea, right? Especially if you could file your return on a postcard.

 Well, we’ve seen lots of proposals here that would make the tax system more complicated, not less complicated. But Obama has one final proposal to solve that problem – at least for those of us who don’t itemize deductions. The IRS will fill out your taxes for you, then send you a copy of your return to verify, sign, and return.

 Pretty sporting, don’t you think?

 How many of you would trust the IRS to decide how much to pay?

 Now, that’s the sort of proposal that sounds great on paper – but may be a harder to make reality. It’s worth noticing that the IRS bought the computers they use to keep your master tax records back when Kennedy was President. So there may be some technical challenges in compiling all the necessary information from employers and getting them out to you in time to file.

Obama promises to pay for his tax cuts by cutting spending, closing corporate tax loopholes, and cracking down on offshore tax evasion. But how realistic is this plan? How likely will he be able to keep his promise?

 President Bush took office with an actual budget surplus, if you accept the government’s own accounting rules. Since then, the combination of lower taxes, higher spending, and an unexpectedly higher defense budget have pushed the deficit up to record levels. For 2009, the Office of Management and Budget is projecting a deficit of $750 billion. That’s almost $2,500 for every man, woman, and child in the country. The total national debt has topped $10.5 trillion. That’s $35,000 for each of us.

 What’s worse, the economy that produces taxable income has stalled. We may not have met the “technical” requirements for a recession – yet – but most authorities agree we’re facing the worst economic outlook we’ve seen since the Great Depression. Back in June it was easy to propose tax hikes for Wall Street millionaires. But since then, Wall Street firms have eliminated over 100,000 jobs. That’s a lot fewer millionaires to pay tax! And Wall Street is hardly the only employer shedding jobs.

 If recent history tells us anything, it’s this. Be prepared for anything to happen – and happen fast. Who would have expected the Treasury Department to commit $30 billion to bail out the investment firm of Bear Stearns? Who would have expected them to spend as much to bail out AIG as they did to in the wake of Hurricane Katrina – and actually buy 80% of the company? Who would have guessed, even then, that the government would wind up committing up to $700 billion to actually buy stakes in banks?

 Obama developed his tax plan over the course of a political campaign. But now he faces economic reality. We shouldn’t be surprised if the legislation he introduces early in his administration poses new challenges we haven’t anticipated.

Here’s your bottom line. You can’t afford to wait until tax time to face the music. You can’t afford to risk an April 15th surprise!

 The key to beating any future tax changes – legally – is planning.

It doesn’t matter how good I am or any other tax consultant is with a stack of receipts on April 15. If you haven’t planned your finances to anticipate the coming changes, you’ll wind up paying more than you have to.

I invite you to call me for a free (Tax Analysis/1040 Analysis/Tax Appraisal, etc.)

 I will give you a plan for rescuing those wasted dollars – and position you to respond to the coming tax changes.

 If you’re serious this should be a very easy decision.

February 22, 2009  Tags: , , , , , , ,   Posted in: Financial

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