So, did you enjoy Tax Day?
It’s about to get worse. Much worse.
On January 1, 2013, a dizzying array of tax cuts, deductions and exemptions are scheduled to expire. The Bush tax cuts will reach the end of their term—again—and the Obama payroll tax cut will retire. The child tax credit will be demoted, and the death tax will rise from the dead. The marriage penalty will start meddling, new Medicare taxes as part of Obamacare will kick in, and tax cuts designed to encourage businesses to invest and hire will be terminated.
You WILL be affected. The rate everyone pays on their first $8,700 of income will rise from 10 percent to 15 percent. In fact, most of Taxmageddon, nearly 70 percent, will fall on the middle class and low-income earners. Estimates of the impact on a typical working class family range from between $1,750 and $3,800 in additional taxes next year alone.
Just next year taxes will rise by $500 billion. How do you think that will affect our still-struggling economy? And over 10 years, taxes will increase in the neighborhood of $3.8 trillion.
Will Congress act in time to solve the problem? In recent years Congress has mastered the art of ignoring “known knowns” until the last minute. And a Senate that hasn’t bothered to pass a budget in over three years is not going to somehow magically get serious about sweeping tax solutions.
Couldn’t Congress just extend everything further into the future again? President Obama says he will not sign a full extension of the Bush tax cuts, and this time he won’t have to; he will either be a lame duck, or newly elected and empowered. Either way, he will hold out for higher taxes on the wealthy as his price for middle-class deliverance.
While Republicans will likely reject these tax increases, they face additional pressures: mandatory spending cuts focused primarily on defense kick in automatically on the very same day. Republicans are reluctant to cut defense, which gives Democrats additional leverage.
There’s little likelihood that anything will be done about this either before or during the election season. My guess is that everything will expire, chaos will ensue, and sometime early in January 2013 the new Congress will take retroactive action, working with whoever occupies the White House. Which means that the outcome of Taxmageddon hinges on the results of the November elections.