Worries Over Tax Hikes Coloring Business Decisions

From the Wall Street Journal:

The uncertainty over looming tax increases is starting to affect both investing and corporate decision-making.

The economy remains the biggest factor in many investors' and businesses' decisions. But worries over whether Congress will extend some of the expiring Bush-era tax breaks are emerging as another important one.

Stock prices of utilities, for example, recently have appeared to be factoring in the possibility of significantly higher dividend taxes next year, several analysts say. Some companies are pumping up dividend payments this year to beat the possible 2011 tax increase, and their shares have rallied.

Small-business owners say unease about tax policy, along with the economy, has led them to hold off on hiring and investment. And many advisers are encouraging well-to-do clients to sell appreciated assets to avoid higher capital-gains taxes.

Congress hasn't decided how to address the tax cuts from the George W. Bush administration, which are set to expire Dec. 31. President Barack Obama proposes to allow taxes on dividends and capital gains to rise to 20% from the current 15% for higher earners, defined as families with incomes of more than $250,000.

President Obama Signs $10b of International Tax Increases

According to the Tax Prof Blog, President Obama signed H.R. 1586 into law yesterday. The legislation creates a “$10 billion fund to prevent teacher layoffs and provide a temporary increase in the Federal Medical Assistance Percentage, funded with corporate international tax changes.”

You can find more information on the new law through the official links below:

White House.gov: Another Step Towards Sustainable Recovery

Technical Explanation of the Revenue Provisions of the Senate Amendment to the House Amendment to the Senate Amendment to H.R. 1586 (JCX-46-10)

Joint Committee on Taxation, Estimated Revenue Effects

Sacred Tax Cows: It's Them or Us

From HuffingtonPost.com:

The National Commission on Fiscal Responsibility and Reform is in a pickle. We can expect Republican members of the Commission to push for cuts in government spending but no new taxes, and Democratic members to argue that tax increases are necessary. With a supermajority required to approve any recommendation, what hope is there of success?

The best hope for bipartisan consensus lies in targeting the $1.2 trillion a year in hidden government spending embedded in the Tax Code in the form of "tax expenditures." These programs are styled as tax savings, but really function as replacements for explicit government spending. Some make sense, but a great many are poorly targeted and would never pass Congress if presented as an outright spending proposal.

Unfortunately, some of the most popular of these tax breaks - in particular, political "sacred cows" like the home mortgage interest deduction, the charitable contribution deduction and the deduction for state and local taxes - are incredibly expensive and give the country very poor returns relative to their cost. Everyone likes these tax breaks, but in light of the long-term fiscal crisis facing the country, we must choose: we can maintain our herd of hideously expensive tax sacred cows, or we can sacrifice them and set the country on the path to fiscal health.

Today the government spends more through tax expenditures than it collects from the personal income tax, and spends twice as much through the Tax Code as it does through explicit discretionary spending programs. Unlike explicit spending, tax expenditures show up in the budget process simply as reduced tax revenues. In reality the tax revenues are there, borne by taxpayers not eligible for the subsidy, and spent on those who do qualify. It's as if the government actually collected roughly twice as much in personal income taxes as it actually does, but then spent all those extra revenues on programs that today are invisible as a matter of budget presentation or debate.

Who Would Obama Tax Increases Hit?

From the Wall Street Journal:

Some conservatives and moderate Democrats say that letting the Bush Administrations tax cuts expire only for top earners, as President Obama has proposed, would actually hurt small business.

Sen. Jon Kyl (R. Ariz.) said the increased tax rates that would result would “clobber small businesses.”

“Small businesses generated roughly 64 percent of net new jobs in the past 15 years,” he wrote in response to a Washington Post editorial. “Of the almost 120 million private-sector workers in the United States, slightly more than half work for small businesses. So if we’re trying to promote economic policies that create jobs, why raise taxes on the job creators?”

Democrats counter that the taxes would mainly hit wealthy–a group voters typically are much happier to tax than small business. They point out that taxes would rise only for those households earning $250,000 or more.

So who would be hurt? Small businesses or rich people?

The Tax Policy Center, a venture of the Urban Institute and Brookings Institution, just released an analysis of IRS figures showing how many of those top earners–whose rate would jump to 39.6%–also are small-business owners.

Tax Foundation: Tax Revenues Fall in 45 States

According to a recent report from The Tax Foundation, state tax revenues fell by nearly 9% in 2009, compared with 2008. There were 45 states that collected less tax revenue, and only five that saw increased tax revenue. Those five states that saw increases are:

1. South Dakota: 0.9%

2. Iowa: 1.3%

3. Oregon: 1.9%

4. North Dakota: 4.3%

5. Wyoming: 13.9%

As you can see, Wyoming was the only state that saw double-digit increases. On the other hand, here are top 10 states with the largest tax revenue declines:

1. Alaska: 51.9%

2. Arizona: 19.7%

3. South Carolina: 16.8%

4. New Mexico: 15.1%

5. California: 15.0%

6. Idaho: 14.1%

7. Virginia: 12.8%

8. Connecticut: 12.1%

9. New Jersey: 11.9%

10. Utah: 11.9%

Tax bills are lower this year, but they will increase

When it comes to our federal government, it seems that nothing good lasts forever. While most of us had lower tax bills due to all the nice tax credits this year, taxpayers earning higher incomes will soon find themselves paying more. I recently read an article published in The Huffington Post indicating that the economic recovery package this year included about $300 billion in tax cuts over 10 years. $232 billion of which, were tax cuts for individuals.

This past year, Congress cut individuals’ federal taxes this year by hundreds of billions of dollars even while state taxes increased to pay state budget deficits. But while tax bills were low for most taxpayers, we need to expect our tax bills will definitely go up in the next few years. What are the reasons for the increases, you ask? For one, former president George W. Bush’s tax cuts will be expiring in January (only a few to be renewed) and then there are Obama’s future increases in the health care overhaul. While some increases will hit lower income taxpayers, those making more than $200,000 ($250,000 for couples) a year will see the largest increase. For the first time, the Medicare payroll tax would be applied to investment income, beginning in 2013. A 3.8 percent tax will be imposed on interest, dividends, capital gains and other investment income for individuals making more than $200,000 a year. Read the full article here.

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Bill Gates suggests Tax Increase in the U.S

Well known for being the richest man in the world, Microsoft’s Bill Gates spoke with ABC News yesterday to talk about the economy. He also proposed raising taxes a solution to help bridge the budget gap. Although his opinions are different from President Obama’s, Gates is convinced his solution is in the best interest of the country.

According to LuckyRoom, Gates has also come out against excessive state intervention, while U.S. president Barack Obama stressed that focus should be put upon longer term policy issues, such as education, to remove the effects of the worst recession experienced by the U.S. since the late the 1930s. “When you face a financial crisis like this, it will take years to disappear completely.

The budget currently shows a large deficit, and although the economy seems to be recovering, barring any changes in tax policy and the tax enforcement mechanism will not return the budget to a balanced position, said president Obama. It is worth mentioning that Gates speech takes place just two days before the annual speech by Obama in Congress, which is expected to focus extensively on economic issues, including the need to create new jobs.

The statements made by Gates that the U.S. economy will take years to recover reflect on the sales figures of old homes in the U.S. which showed a greater decline after three consecutive increases in by big tax reduction. Sales of old homes fell 16.7% in December, while analysts were expecting a fall below 11.6%.

Continue reading at LuckyRoom…

Obama: Requiring Health Insurance is not a Tax Increase

In his recent media campaign to promote his health care President Obama told ABC's "This Week" on Sunday that forcing people to obtain health care coverage is not a tax increase. Therefore, it does not break his promise to raise taxes on middle income Americans.

"For us to say you have to take responsibility to get health insurance is absolutely not a tax increase," Obama said in response to persistent questioning, later adding: "Nobody considers that a tax increase."

A proposal going before the Senate Finance Committee this week includes the mandate for health coverage. Obama has praised the plan in general, and indicated in the interview conducted Friday that he could back the coverage mandate.

He noted that consumers currently pay higher health insurance premiums due to the costs run up by hospitals and other facilities providing care to uninsured people.

Those unable to afford health insurance should get government help, Obama said, but others who can afford coverage but choose not to get it should face coverage requirements similar to those for auto insurance.

Continued at CNN.com…

Examples of How Tax Increases could Hit the Rich

Over the weekend, I came across this informative article from the Associated Press explaining how families would be impacted if the House’s new tax increate were to become law. As you can see from the examples below, some taxpayers could face a huge tax bill next April.

• A family of four making $450,000 a year would pay $103,600 in federal income taxes, an increase of $1,000.
• A single filer making $450,000 a year would pay $112,200 in federal income taxes, an increase of $7,100.
  
• A family of four making $800,000 a year would pay $220,800 in federal income taxes, an increase of $30,000.
  
• A single filer making $800,000 a year would pay $231,300 in federal income taxes, an increase of $30,700.
  
• A family of four making $5 million a year would pay $1.81 million in federal income taxes, an increase of $443,500.
  
• A single filer making $5 million a year would pay $1.83 million in federal income taxes, an increase of $452,000.

Health Care = Tax Increases

This morning it seems like all the headlines are about the new plans for health care reform. For those of you who have not have heard, yesterday House Democrats unveiled their health care reform bill (H.R. 3200). To finance the massive project, they are hoping to raise taxes on the following taxpayers.

• 1.0% increase for married couples earning $350,000 - $500,000
• 1.5% increase for married couples earning $500,000 - $1,000,000
• 5.4% increase for married couples earnings > $1,000,000

Additionally, the 1.0% and 1.5% rates are scheduled to increase in 2013 to 2.0% and 3.0% unless the government can find $150 billion in health care savings. Understandably, many taxpayers are angered by the announcement, which would push the total tax rates in some states to nearly 60%.

As the Wall Street Journal points out, “Obama has promised to let the lower Bush tax rates expire after 2010. This would raise the top personal income tax rate to 39.6% from 35%, and the next rate to 36% from 33%. The Bush expiration would also phase out various tax deductions and exemptions, bringing the top marginal rate to as high as 41%.”

Then add the Rangel Surtax of one percentage point, starting at $280,000 ($350,000 for couples), plus another percentage point at $400,000 ($500,000 for couples), rising to three points on more than $800,000 ($1 million) in 2011. But wait, there's more. The surcharge could rise by two more percentage points in 2013 if health-care costs are larger than advertised -- which is a near-certainty. Add all of this up and the top marginal tax rate would climb to 46%, which hasn't been seen in the U.S. since the Reagan tax reform of 1986 cut the top rate to 28% from 50%.

States have also been raising their income tax rates, so in California and New York City the top rate would be around 58%. The Tax Foundation reports that at least half of all states would have combined state-federal tax rates of more than 50%.

The Associated Press also published an article on the new surtax, claiming that the “House Ways and Means Committee announced it would vote on the proposal beginning on Thursday. The panel is one of three that must act before the bill can go to the full House, probably later in the month.”

Their article also explains Obama’s involvement in the bill, noting that “the developments occurred one day after President Barack Obama met with key Democrats in a White House session in which he told a powerful Senate chairman he wants legislation by week's end in his committee.”

In a statement, Obama praised the proposal, saying it "will begin the process of fixing what's broken about our health care system, reducing costs for all, building on what works and covering an estimated 97 percent of all Americans. And by emphasizing prevention and wellness, it will also help improve the quality of health care for every American."

In addition to Obama’s efforts to work with congress, his administration is also set to begin airing television commercials to generate more support for their plan. According to Yahoo Finance, “the 30-second ads will begin airing Wednesday in Washington, D.C., and on cable TV nationally. In the ads, private citizens describe problems they've had with the medical system and say it's time for action. The sponsor is Organizing for America, Obama's campaign organization, which has become part of the national Democratic Party. The group would not reveal the cost.”

Obama Says ‘Robust’ Growth Will Prevent Tax Increases

From Bloomberg.com:

President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam.

“One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

“I’m confident that we don’t have to raise taxes on ordinary working families,” he said.

The U.S. economy shrank at a 5.7 percent annual pace in the first quarter, reflecting declines in housing, inventories and business investment. Growth is expected to turn positive in the second half of the year, accelerating 0.5 percent from July through September and 1.9 percent in the final three months of this year, according to the median estimate in a Bloomberg survey of 62 economists. The median forecast for growth next year is 1.8 percent, according to the survey.

Obama To Increase Taxes In A Recession

Earlier this morning, the SF Examiner posted an article discussing Obama’s plans to raise taxes on individuals and businesses, to reduce the size of the Federal budget. A snippet of the post can be read below, but the full text can be found here.

President Obama announced today that he will reduce the size of the federal budget, cutting $513 billion in his first term by increasing taxes on individuals and business who make over $250,000 and by slashing spending on the wars in Iraq and Afghanistan. He cited concern over a burgeoning federal deficit that he himself helped to create with a $787 billion stimulus package, admitting that large deficits will make it hard for the economy to grow over time.

The announcement may have been ill-timed. So far, the stock market has shown little confidence in the administration's handling of the economy and is poised for another down day on Monday. Raising taxes while cutting government spending reduces liquidity that can be used to create investment. Businesses will immediately adjust their plans to compensate for reduced demand and investment capital. As Alan Greenspan said today at the Economic Club of New York, a fiscal stimulus plan that only increases GDP through temporary government spending will fail unless it "primes the pump" and increases demand. If the stimulus package does not work, permanent tax increases could put more strain on economic activity.

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