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The Largest Tax Increase in American History is Only Six Months Away

In observing some of the more insightful comments about my recent post regarding our nation slipping into a full-fledged economic depression, it occurred to me that some folks may be incognizant of the magnitude of the looming tax increases set to hit us in a mere six months.

The tax increases (primarily the expiration of the Bush tax cuts) set to hit the American people on January 1, 2011 have received scant media coverage, but their cumulative effect upon the American people will be truly massive. Never in American history has such a significant portion of existing tax code changed all at once as the tax laws enacted in 2001 and 2003 under President Bush and Republican Congress are allowed to expire. Unlike most previous increases, these sweeping changes will dramatically impact all taxpayers, not just the wealthy.

Many citizens may be surprised to learn that taxpayers in the lowest bracket will experience a significant increase in their federal income tax as our current six tax brackets are replaced by five higher ones:

Taxpayers currently in the 10% bracket will pay 15%
Taxpayers currently in the 15% bracket will pay 15%
Taxpayers currently in the 25% bracket will pay 28%
Taxpayers currently in the 28% bracket will pay 31%
Taxpayers currently in the 33% bracket will pay 36%
Taxpayers currently in the 35% bracket will pay 39.6%

The marriage tax penalty returns in six months. Currently, the standard deduction for married couples filing jointly is double that of those filing singly. However, in six months, married couples lose one-third of the standard deduction for either the husband or wife as the joint deduction is reduced to 167% of the total of two non-married single taxpayers. This represents a decrease of $1900 in the standard deduction married couples can claim. That translates to several hundred dollars in additional federal income tax.

Large families of all classes will be hit particularly hard next year as the standard deduction for children will be slashed in half to only $500 per child. Thus, a family of four children will lose $2000 of tax credits they enjoyed under the existing law. Families caring for other dependents will see their tax credits reduced from $3000 to $2400.

These increases, in of themselves are quite astonishing. While the poorest Americans who pay little income tax may not be affected, the vast majority of the working class will be shocked to learn that no refund checks are forthcoming because the marriage penalty has been reinstituted and the child credits have been slashed. Again, a married couple with four children loses around $2300 in tax credits. A typical family with only two children and earning $50,000 to $80,000 would see their total annual federal income tax triple to around $2800 with these increases alone. I'm not getting a sense that many people are aware of this.

The new tax laws will also adversely affect property owners and investors. Today the top federal tax on long-term capital gains and dividends is at 15%. However, in January the maximum tax on long-term capital gains rises to 20% and the top rate on dividends surges to an investment-crippling 39.6%.

Wealthier citizens will see the reimplementation of phase-out rules for itemized deductions and personal exemptions At present, itemized deductions for everything from business expenses to mortgage interest are allowed. However, wealthier taxpayers (over $200,000 annual income) will see these deductions phased out to the tune of 80% in some cases.

The estate tax employing the "stepped up" basis will return with a 55% maximum rate
(including surtax) and a $1 million exemption. Currently the estate tax is zero. If you are very wealthy and intend on leaving money for your grandchildren, you may want to give it to them now because under the new estate tax law, the federal government will seize 82% of your estate when it is left for grandchildren.

Business owners may be the hardest hit from the sweeping changes next January. Payroll taxes are set to increase as much as 10%. Presently, small businesses can expense out equipment purchases up to #250,000. This will be slashed all the way down to $25,000. Larger businesses can expense only half of their equipment purchases. This will undoubtedly suppress expansions and hiring.

The list of increased taxes upon the American people goes on and on. The credits for homeowners who purchase energy efficient appliances will disappear. The American Opportunity Tax Credit expires. The tax credits to hire unemployed veterans will end. The tax credits to hire disadvantaged youth are gone. The Work Opportunity Tax Credit which allows employers to credit up to 40% of the first-year wages of a new employee will expire.

Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). The "Special Needs Kids Tax", a provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 while currently there is no federal government limit. One group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children.

All these increases in our federal income tax will come at a time when many state and local taxes will be on the rise as well. As the liberals in power plow forward for even more massive revenue enhancements such as the Value Added Tax, it seems Mr. Obama may encounter some difficulty in reconciling his campaign pledges of tax decreases for everyone earning less than $250,000.


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Comments (20)

Rules for destroying a succ... (Below threshold)
Don L:

Rules for destroying a succesful nation

Rule #1 Lie -(if caught, lie about it)

Rule #2 -Destroy the family

Rule #3 Destroy the common morality and culture

Rule #3 Destroy the economy

Rule#4 raise taxes (see rule#3)

Rule #5 take over corporations (see rule#3)

Rule #5 take over the healthcare (see Rule #3)

Rule #6 use the IRS as SS Troops (see Rule #3)

Rule #6 Cause violence to declare martial law (see rule #3)

Correct me if I'm wrong, bu... (Below threshold)

Correct me if I'm wrong, but didn't the Obama administration originally claim that only the 35% income tax bracket would revert back to pre-2001 rates?

"While the poorest Am... (Below threshold)
John S:

"While the poorest Americans who pay little income tax may not be affected..."

On the contrary, the poor will be slammed. Due to the administration's good work on jobs, I've gone from the 25% bracket (dodging the AMT each year) to the 10% bracket. In my case, in 2011 my income tax will rise 50% to 15%. And before the election, I wasn't even one of the poorest Americans, but I was laid off by a small business the week Obamacare was signed. Let's just say the future looks pretty bleak.

This should be required rea... (Below threshold)

This should be required reading for everyone who voted for "hope and Change". I brought an article like this to my office yesterday and people started freaking out. The general puclic has no idea what is coming and if the Republicans don't run on this, I will give up all hope. My business can't survive another 2 years of this bumbling fool.

Fact patrol here again. And... (Below threshold)

Fact patrol here again. And the expiration of the Bush tax cuts is NOT the largest tax increase in history - sorry.

There are at least 2 presidents in line ahead of that - FDR and Bill Clinton. And possibly even Ronald Reagan, depending on whether you count only income taxes or all taxes.



You guys really should check your facts before you post them. I'd also suggest not trusting the sources who feed you this false information. It may be emotionally comforting to have someone else validate your worst fears. But after a while don't you get tired of being manipulated with hyperbolic falsehoods like this?

jim, there are statistics, ... (Below threshold)

jim, there are statistics, damn statistics, and lies....

reading the politico article, it looks like the are trying to muddle the issue a bit. taxes based on the percentage of GDP? does that take into account population growth? what's the per capita tax rate change? what's the real dollar value of the tax increases coming? how do these changes break out across different income levels? those are interesting questions that they don't even address.

the other link goes to an article form 2004.

in any case, even if the tax increase that is about to happen is not the largest, it's still big enough to put a stake in any possibility of economic recovery. which i believe is the point Alan is trying to make.

"« LeBron James is movin... (Below threshold)

"« LeBron James is moving to Miami | Main | Obama claims Jews mistrust him because of his middle name »

The Largest Tax Increase in American History is Only Six Months Away"

In other news the hole remains unplugged and Barry shot a 114 on the front 9.

The past is prologue - what... (Below threshold)

The past is prologue - what other administrations have done must be examined in the light of the actual RESULTS of their policies.

With the Obama administration's economic policies, you've got the equivalent of a paramedic tapping a trauma victim bleeding on the stretcher for a couple of pints of blood. The reasoning behind it? "Hell, he's still got a pulse, he's good for it!"

Well Barry has broken every... (Below threshold)

Well Barry has broken every other taboo in his quest to validate his 'worst presider in chief evahhh' status.

If worst comes to worst (heh heh) He can can always blame BUSSSSHHH!!

As a financial advisor, I h... (Below threshold)
George True:

As a financial advisor, I have felt like the proverbial lone voice crying out in the wilderness when I would try to tell people about this the last several years. There is ZERO awareness of this among the general public, and the MSM is steadfastly avoiding the topic at all costs.

This could and should have been one of McCain's most potent weapons to use against Obama in the 2008 campaign, but he never brought it up, not even once. During any of the debates, it would have been devastating if McCain would have just turned to Obama and said, "Senator Government, you have claimed that nobody making less than $250K will see any kind of tax increase. Yet you have also gone on record numerous times saying that you fully intend to allow the Bush tax cuts to expire. When you do that, a family making just $46,000 a year would see their federal withholding tax DOUBLE. Senator, when you sit one your hands and allow a tax cut to expire, isn't that the same thing as enacting a tax INCREASE???".

Why McCain never went there I will never know. I sent letters and emails to his campaign headquarters pointing out to them what a potent weapon this issue could be, and all I heard back from them was...crickets chirping. By the same token, I do not understand for the life of me why every Republican running for office this year is not putting this issue front and center and just hammering it relentlessly. Are they really that clueless?

The point that Alan is tryi... (Below threshold)

The point that Alan is trying to make is in my opinion wrong for various Keynesian reasons, which I've discussed extensively in other posts.

But if something is wrong, it's wrong. Since this is not the largest tax hike in history, I think that's worth pointing out. But that's me.

"The Largest Tax Increas... (Below threshold)

"The Largest Tax Increase in American History is Only Six Months Away"

Hide your women and children!!

Jim X, I think what your f... (Below threshold)

Jim X, I think what your failing to see is the impact this will have on the working middle class, especially in this economy.

The sudden re-institution of the marriage penalty, decemating the child tax credit and the phase out of all savings benefits is a HUGE FREAKIN deal bud! This is the single largest middle-class tax increase in our history and coming on the heals of an Obama led recession is going to devestate the weak recovery.

An older gentleman that I know warned me before he died that this man would devestate our country and that the white guilt that got him elected was misplaced, btw he marched in the 60's for civil righs so it was not based on race, just in case Lee reads this, he said that the man was not ready to become president and that he is being led by Facist/Socialist. I dismissed it as hyperbole but I really have to re-think that.

The past is prologue - w... (Below threshold)

The past is prologue - what other administrations have done must be examined in the light of the actual RESULTS of their policies.

Clinton presided over what many Republicans also called the largest tax increase in American history. I believe the RESULTS were unprecedented prosperity. Arguing a direct causal relationship is too simplistic, but it's worth pointing out that a tax increase does not automatically translate into economic calamity.

Deke, I'm not failing to se... (Below threshold)

Deke, I'm not failing to see it - I disagree utterly that it will have that effect.

As my counter-evidence I present two other increases in taxes that benefited the economy: FDR's and Bill Clinton's.

Tax increases are not always bad, especially if the increased revenues are invested into programs that benefit the long-term wellbeing of the poor and middle class.

Jim, whenever the governmen... (Below threshold)
George True:

Jim, whenever the government steals money from someone who earned it, and then gives it to someone else who did not earn it, it is ultimately bad for everyone.

Nancy Pelosi recently tried to make a case for why extending unemployment benefits were the quickest way to create jobs. Her rationale was that the unemployed will immediately go out and spend the money on things they need, thus "stimulating" the economy, thus causing the companies who make those necessary things to hire more people, etc. What she and all leftists fail to think through is that in order for government to give out unemployment benefits, they first have to take the money from other people. Those other people will then not have that money to go out and buy the things that THEY need and want. There is no net "stimulation" to the economy, because in order to stimulate it in one place, they first had to un-stimulate it somewhere else.

I recommend you read "The Wealth of Nations" and "The Road to Serfdom" by F.A. Hayak. Also, anything by Ludwig Von Mises re: The Austrian SAchool of Economics. Regards.

As my counter-evidence I... (Below threshold)

As my counter-evidence I present two other increases in taxes that benefited the economy: FDR's and Bill Clinton's

Jim, you do realize that neither FDR's and Clinton's tax increases benefited the economy in any way? That Clinton's increases, after the dot com bubble burst, kept us in a rescession that the Bush cuts brought us out of?

As far as FDR is concerned, historically speaking, we now know, that they would have done nothing and actually made things worse, that if it wasn't for WWII the U.S. and the world for that matter, were in a HUGE amount of trouble.

To make a fine point of it, both of those increases you site were not aimed at the middle class, unlike the ones we are going to see next year.

"Since this is not the larg... (Below threshold)
Alan Orfi:

"Since this is not the largest tax hike in history, I think that's worth pointing out."

I'm afraid you may not be aware of the fact that 69 separate income tax increases are being implemented on January 1. Sure, if you are just looking at the brackets, then of course there have been larger hikes. But in tandem I could not find a previous instance where the federal government has attempted to seize more revenue from the people in a single-moment increase.

The Joint Committe on Taxation lists all of these increases. The download can be found at http://www.jct.gov/publications.html?func=startdown&id=3646

Looming US tax hikes set to... (Below threshold)

Looming US tax hikes set to double unemployment

"The US economy is in shambles and that the bright light at the end of the tunnel may well be an approaching freight train, loaded with dynamite.

Fears among some analysts now are that between 2011 and 2012, the actual unemployment and underemployment ranks will swell to a mind-boggling 35 percent ... one-third of America's able workforce."


This entire post from Orfi ... (Below threshold)

This entire post from Orfi is amazing.






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