« What Are Your Thoughts On These Proposed 401(k) Changes? | Main | Maybe They Should Just Stick to Cash »
The Middle Class Will Face Tax Increases Too
By JLP | February 2, 2010
Don’t have time to discuss but thought this was an interesting piece by Terri Cullen: Backdoor Taxes to Hit Middle Class.
Topics: Taxes | 22 Comments »
February 2nd, 2010 at 4:29 pm
The story is wrong and has been pulled. Hence no longer interesting.
http://www.reuters.com/article/idUSTRE6114QK20100202
February 2nd, 2010 at 4:30 pm
It depends on what you define the “middle-class” as. Obama made it clear that if you earn $250k or more, then expect tax increases. I’m well under half of that…perhaps I’m “low-class”
February 2nd, 2010 at 4:37 pm
Reuters has withdrawn this article citing “…significant errors of fact.” http://tpmlivewire.talkingpointsmemo.com/2010/02/reuters-pulls-backdoor-taxes-story.php
February 2nd, 2010 at 4:45 pm
#1 CodeSlave) glad they pulled it, because I went and looked back at the State of the Union transcript, and Obama said:
“…We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work. We’ve already identified $20 billion in savings for next year. To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can’t afford it…”
February 2nd, 2010 at 4:54 pm
BG,
That quote by Obama should tell you that he’s full of crap. If cutting costs were really that important, he wouldn’t be doing backroom deals in order to get health care passed.
Now all the sudden, he “responsible.” Give me a break.
Besides, who does he think he’s going to hurt by discontinuing tax cuts for oil companies? Who buys gas?
February 2nd, 2010 at 5:15 pm
#4 JLP) Obama isn’t a senator anymore, he’s in the executive branch (though in the same party that you have issues with). From the speech:
“…To do that, we have to recognize that we face more than a deficit of dollars right now. We face a deficit of trust – deep and corrosive doubts about how Washington works that have been growing for years. To close that credibility gap we must take action on both ends of Pennsylvania Avenue to end the outsized influence of lobbyists; to do our work openly; and to give our people the government they deserve…”
As for your comment about discontinuing tax cuts for oil companies, he address that in the speech as well:
“…From some on the right, I expect we’ll hear a different argument – that if we just make fewer investments in our people, extend tax cuts for wealthier Americans, eliminate more regulations, and maintain the status quo on health care, our deficits will go away. The problem is, that’s what we did for eight years. That’s what helped lead us into this crisis. It’s what helped lead to these deficits. And we cannot do it again…”
I tend to agree with Obama. Why is the US taxpayer subsidizing Exxon’s profits anyway? Why is the US taxpayer subsidizing any companies profits for that matter (banks, corn industry, etc)?
For a free-market person, I’m surprised you’d be against eliminating the oil-industry tax breaks from the energy bill of 2005. Or are you arguing without those tax breaks we would’ve seen $200 a barrel instead of $140?
I personally don’t believe in the so called ‘trickle-down’ theory. Record executive pay/bonuses is proof that money is not trickling down.
February 2nd, 2010 at 8:10 pm
BG, a more free market would mean less government intervention — lower taxes, not higher taxes.
February 2nd, 2010 at 9:49 pm
#6 Joseph) I agree. So lets cut the taxes on small business, instead of giving all the breaks to largest company in the US (exxon). As Obama said, to pay for the tax breaks on small business he will allow the recent tax breaks the Oil industry got to simply expire.
Don’t blame Obama, blame Bush and his republican congress that put expiration dates on the tax cuts
February 2nd, 2010 at 10:33 pm
$250k is an arbitrary number…just the thing that got into this AMT ridiculous situation. How can someone say that $250k is “rich”?
regardless of what people say, anytime you take money away from a company’s bottom line, it invariably leads to said company increasing the cost of service and goods to the consumer. It’s not a tax, but it will be inflation. call it what you will, it means you will spend more money on goods and services in the end.
the notion you are saving $20bn of money you don’t have to begin with is ridiculous. you didn’t save anything, you have simply decided not to spend $20bn. If you saved $20bn, then give it back to where you got it: the tax payer. unfortunately, it isn’t money to give.
we have subsidized US companies, because if we didn’t they would simply go to a more tax friendly place.
February 3rd, 2010 at 12:47 am
#8 Tim) “How can someone say that $250k is “rich”?”
Umm, everyone who makes less that $250k says that $250k is rich, just like everyone thinks they are middle-class because Bill Gates is wealthier.
Only 1.5% of households earn $250k or more (15 out of every 1000 households). So, Obama’s refusal to extend the Bush tax cuts on those earning more than $250k is affecting a very small portion of the population. And that portion of the population is best equipped to _afford_ it.
If you make $450k in income, your tax bill will go up $4,000 once the old tax-cut expires, big deal.
If you make that kind of money then start your own business and hire some employees, and get those sweet small-business tax credits. Hiring just _one_ employee (and getting that proposed $5k tax-credit) more than offsets the $4k increase in income taxes.
Trickle the money down, or pay higher taxes, simple as that.
February 3rd, 2010 at 9:22 am
This blog is quickly degrading away from financial advice.. JLP it seems your only advice is to get a new president. Just like when economies go down and expenses go up, taxes are like every other necessary expense. They are going to fluctuate and you are going to have to pay them. I wonder if this blog will be useless for the remaining 3 years.
February 3rd, 2010 at 3:34 pm
@#9) “If you make that kind of money then start your own business and hire some employees, and get those sweet small-business tax credits. Hiring just _one_ employee (and getting that proposed $5k tax-credit) more than offsets the $4k increase in income taxes.”
…Except you’ll be paying that employee’s salary and health care etc in perpetuity in a time when the economy is crap and you don’t need more workers. So really, still a loss, if not more so. Not to mention the risk of starting your own business…
February 3rd, 2010 at 3:59 pm
#11 Chris) The government/environment is being setup to create a monetary _incentive_ to create jobs. I really can’t ask anything more of my government than that right now.
For entrepreneurs willing to take that risk, this is the best time to do so. Google and many other large corporations today came from the ashes of the 2000 recession — and I expect the same will happen from this one.
Repealing the tax cuts on the oil industry, and giving it to small business instead is a great idea. Look at the large corporations from the past, virtually all are gone now. Oil is not the future anymore: it’s coal, natural gas, nuclear for us in the US. We have many more BTUs of coal and natural gas than all the oil in the Middle East.
My future predictions are massive increases in our electrical grid infrastructure to handle the fleet of electric cars we will all be driving in 10-20 years. That’s the future, forget oil.
February 3rd, 2010 at 10:06 pm
@BG, I can do much more for the economy with that $4000 (not sure how you got that figure) than the govt who will leverage it 10 fold to incentivise its further spending. $250k is arbitrary when you are talking about cost of living and in future context. That 5% also pays over 90% of the taxes already. i’m fine with giving those who pay 10% of the tax revenue of the US back some or not taking as much from them so long as the govt stops spending, but that won’t happen.
the biggest issue i have is the budget proposal is that it continues to only patch AMT (again $250k is going to be some arbitrary number in 10 years like the AMT) rather than permanently fixing the problem. Second, the budget lets capital gains tax increase. That is going to have a huge impact on the middle class since we’ve been sold on the whole 401k and ira thing. you can tax and take more away from those things that actually stimulate and create stuff, which means higher inflation for all those middle class folks. This whole thing extrapolates out not saving the govt anything, because less revenue for companies, means less revenue for the govt. you can’t take from peter to pay for paul.
whoever sold us on the idea capacitance based energy, which is inherently less efficient than anything else out there, is doing a great job at feeding us a line of b.s. how are you going to power the electric grid by the way? yeah, many people forget that the electricity doesn’t automatically appear just because you plug something in an outlet. investing in inefficient power resources will inherently cost more in the long run too. not saying that we can’t develop alternative energies, but capacitance based energy is a complete waste of money.
you can tax oil companies more, just understand that that will come directly out of the pockets of those middle class folks. so you are willing to subsidize small business but not big business. I don’t get the logic. how efficient is the cost benefit of subsidizing small businesses? i’m all for helping entrepreneurs out, though.
anyways, the budget is far from being approved, and i guarantee that the measly $20bn in savings won’t happen. We can start cutting the budget by reducing the federal work force, reducing the expense accounts of govt employees (e.g. senators and congressmen and their staff). The biggest way to balance and pay off debt is stop spending more than you make. I have yet to see anything that addresses stopping spending. I only see robbing peter to pay paul
February 3rd, 2010 at 10:16 pm
The fact is taxes are going up in 2011 on income, capital gains, dividends and estates. And the middle and upper class already pay 95% of taxes. The lower 50% of income earners pay less than 5% of income taxes. When half of taxpayers can confiscate everything from the other half, you have a tyranny of the majority. If you don’t know what that means, look it up, it’s the next step on the way to socialism.
February 3rd, 2010 at 10:27 pm
I’m not sure where Tim gets the idea that higher capital gains are going to affect the middle class. The middle class are not big holders of stocks although they do own them through mutual funds in their 401(k)s. The only thing is, they don’t pay any tax on capital gains in their 401(k). A capital gains tax increase has almost no impact on the middle class.
The vast majority of shares that are subject to capital gains taxes are held by the wealthy which own 90% of the wealth in this nation.
The capital gains tax cut was a tax cut for the wealthy. And it really hasn’t accomplished much other than save them a boatload in taxes.
The stock market has done doodly since that tax cut. When capital gains taxes were 28%, the market was regularly returning 15% per year. Stock market performance has nothing to do with capital gains taxes.
If it did, the stock market would never have performed very well because taxes have been significantly higher in the past.
People invest in stocks to make a killing. If you make 100% or more on a stock, you aren’t so much concerned with whether you pay 15% or 25%. If you are a fat cat, you aren’t going to buy treasury bonds and make 4-6% and pay 39% in taxes because the capital gains tax rate was raised to 25%.
February 4th, 2010 at 12:17 pm
#14 Tim) About the $4000 figure, I am off a bit. For MFJ at $400k taxable income (after deductions, exemptions, etc — which someone grossing $450k could get to), the tax increase will be about $4,932.
Nothing is in stone yet, but what I think is going to happen is that the 33% bracket is going to be shortened down to $250k MFJ or $200k single. This bracket must be like this for Obama’s claim that he is not raising taxes a single penny for Married under @250k, or singles under @200k — unless he is giving a credit somewhere else.
The old 33% bracket will now be 36% (income starting at 250k MFJ, or 200k single), and the old 35% bracket will be 39.6% (for incomes over $390k-inflation adjusted).
Basically he is keeping the Bush tax cuts on the lower income people, and allowing the tax cuts to expire on the more well off, so your taxes will be similar to what you had under Clinton.
Now, a tax-cut _is_ spending as well. When Bush enacted these tax cuts, he did not ‘pay’ for them with reductions somewhere else (he did not follow the ‘pay-go’ policies of Clinton), which really ballooned the budget and massively increased the deficit. Read this clearly: Bush ‘financed’ the tax cuts — we are paying interest on debt because of them. Eliminating the old tax-cuts that we couldn’t pay for then, and can’t pay for now, is a _reduction_ in spending.
I read somewhere that the tax cuts for the top 1% of Americans (who got the majority of the cuts) cost about twice what the Homeland security budget is. The AMT stuff is political fodder — it is not in any politicians interest to permanently fix it, because it gives them talking points that they ‘cut taxes’ every time the re-fix AMT for another year.
February 4th, 2010 at 12:50 pm
#14 Tim) For your energy remarks. It is much more efficient for a powerplant to burn coal/oil/naturalgas, to create steam and generate electricity — than it is for me to have a ‘miniature’ power plant / engine in my car. MUCH more efficient for the power company to do it.
Electric vehicles “tank-to-wheels” is 3 times more efficient than internal combustion engines:
http://ec.europa.eu/transport/urban/vehicles/road/electric_en.htm
As for the comment about taxes ‘robbing peter to pay paul’ — it’s always been that way. All taxes are targeted at certain groups based on economic class, and a wide range of other things. Looks at the insanely high sales-taxes on cigarettes…
February 5th, 2010 at 7:52 am
@Retiredat40: I think you grossly underestimate who owns stock and mutual funds. Moreover, institutional investors own a ton of stock and funds, who will be affected by higher capital gains. Those things like pensions, endowments, etc will all be affected which directly impact how much will be available to the middle class, etc. it is odd that people cannot extrapolate the affect. The middle class might not be affected directly by a higher capital gains, but when the big institutions are that translates in less money available to the middle class and higher cost for goods and services the middle class has to for. I don’t think I correlated stock market growth with capital gains tax. I disagree with your contention people invest in the stock market to make a killing. yes, there are those who use the markets to do so, but the vast majority of wealth is held by institutional investors.
@BG, a tax cut is not spending, it is less revenue coming in, which is different than spending. I am dumbfounded how we have this concept that it costs the govt money reducing revenue. It only costs the govt money, because the govt wants to continue spending beyond its revenue. It’s money they shouldn’t count on to begin with. It’s the same concept as people who think that they have money to spend since they have a $10,000 credit available on their credit card. The govt budget works backwards from how a budget should work. They create a spending program not a budget. I agree that AMT issue gives an easy “cut tax” bullet.
February 6th, 2010 at 3:55 pm
So, apparently this article was so “interesting” that Reuters retracted it:
http://www.reuters.com/article/idUSTRE6114QK20100202
Even more “interesting” is that the article was apparently so awful and riddled with factual errors that there won’t be a corrected version.
You sure have a knack for picking ‘em, JLP. Keep up the good work!
February 8th, 2010 at 3:54 pm
Tim) About the tax-cut==spending. This is why we need the ‘pay-go’ (pay as you go) policies back in place. If the government wants to give a tax-cut (reduce income), then they would be forced to cut-spending somewhere else to ‘pay’ for the tax cut. We should be able to agree that there is a cost associated with reducing taxes…
The previous administration’s tax-cut ‘cost’ about $1.3 trillion (that much reduction in income), but no reduction in spending accompanied it. So, we took on more debt to ‘pay’ for the cut. If you look at it this way, then you see the costs of these policies.
It’s all political tricks anyhow. Give a tax-cut, refuse to reduce spending, increase debt to pay for the cut, blame it on the next administration for running deficits..lol. Why anyone would want to be a politician is beyond me.
February 12th, 2010 at 11:24 pm
@BG…for the health-care plan and other perks.