ON JANUARY 1, 2013, JUST 56 DAYS after the November 6 presidential election, a series of temporary tax cuts will lapse, and rates will automatically and immediately “snap back” to where they once were, in some cases more than a decade ago. These increases will add $500 billion to the nation’s tax burden in 2013, and, over the next decade, will take $5 trillion out of the economy and ship it to Washington.
At the same time, several of the new taxes passed to pay for Obamacare will conveniently begin to bite. Someone, for some reason, believed it wise to delay those taxes’ implementation until someone was safely re-elected. Of the 20 new taxes or tax hikes in Obamacare, four will take effect January 1, including a 3.8 percent surtax on investment income (on top of existing capital gains and dividend taxes) and a 2.3 percent excise tax on medical devices, such as wheelchairs, pacemakers, and children’s braces. (If the Supreme Court strikes down Obamacare in its entirety, this would pare back the tax hit by $23 billion in 2013 alone.)
THE UNSETTLING LEGISLATION includes a litany of lower tax rates and higher credits that were enacted in separate packages.
The 2001 “Bush” tax cuts reduced marginal tax brackets from 15, 28, 31, 36, and 39.6 percent to 10, 25, 28, 33, and 35 percent; they also doubled the per-child tax credit from $500 to $1,000.
Not only are the old rates set to return, but a family’s taxes will go up $500 for every child it has under 18.
The 2003 “Bush” tax cuts reduced rates on capital gains from 20 percent to 15 percent and on dividends from 35 percent to 15 percent.
When the old rates snap back and the Obamacare investment tax of 3.8 percent is added, the top capital gains rate increases to 23.8 percent, and the rate on dividends spikes to 43.4 percent.
Thus the tax on dividends will nearly triple, from 15 percent to almost 45 percent. Some argue this will drop the value of dividend-heavy stocks by one-third. Perhaps the lost value will be less than that, but the direction is emphatically down. Big time.
The Alternative Minimum Tax (AMT) patch limits the number of families the AMT hits to “only the rich.” The AMT was enacted in 1969 to punish 155 wealthy Americans who were paying little or no taxes—probably because they were invested in taxfree municipal bonds. The “patch” was enacted in 2001 and has been renewed every two years since. Today, 4 million families pay the AMT. Next year, without the patch, it will apply to 31 million families and rake in $56 billion. Over the next decade, the AMT will confiscate $1.7 trillion from a pool of families growing to 55 million—those too rich for Obama’s taste.
The death tax also holds a surprise for any Americans foolish enough to die a minute after midnight on New Year’s Eve. The present death tax, which confiscates 35 percent of lifetime earnings above $5 million, will become one that takes 55 percent above $1 million.
In total, the hikes lying in wait will permanently increase the tax burden (in a non-recession economy) from 18.5 percent of GDP, the last two decades’ average, to 21 percent. Thus Obama’s increase in spending from 21 percent of GDP, the last two decades’ average, to his “new normal” of 23 percent will be locked in and “paid for.”
HOW DID WE GET SUCH A COLLECTION of temporary tax rates, and why are these cuts termlimited? Two big reasons.
First, Republicans in 2001 and 2003 could muster only a bare majority in the Senate. Without the votes needed to break a filibuster, they could only enact tax cuts through the “reconciliation” process that allows a federal budget to pass by a simple majority. But tax cuts passed that way can last no longer than 10 years.
Second, cutting taxes outside of reconciliation requires 60 votes—a high bar, as the modern Democrat Party opposes on principle any and all permanent tax cuts. In the pre-Obama, pre–Harry Reid years, this wasn’t necessarily so. Democrats provided 114 House votes and 25 Senate votes for the Reagan tax cuts. But there is no longer any such thing as bipartisan tax reduction. Democrats in Washington have refused to vote for permanent tax cuts since 1981. They are now a party of big government fundamentalists. They think your income is theirs to dispose of, and they view permanent, untargeted tax cuts the way East German border guards viewed defectors—that is, something escaping their control.
And some Republicans like temporary tax cuts. It forces the business community (read: campaign donors) to come back every two years to lobby to extend the research and development tax credit, and makes wealthy donors return to grovel for a new AMT patch.
So now what?
This scheduled tidal wave of tax hikes does not require any vote by Congress. The president does not need to sign anything. It will just happen.
Some hope for a “compromise,” but that’s not likely before the November election. Democrats are campaigning for additional taxes on the rich to pay for Obama’s debt buildup.
This has not worked very well, as the “Buffett Rule,” a 30 percent tax on incomes over $1 million, would raise only $47 billion in the next decade, during which time Obama’s debt is projected to grow by $6.8 trillion. Average voters are reminded only that Obama will be back to get the missing $6.795 trillion from the middle class. (Again, trickle-down taxation: Democrats talk about taxing the rich and then end up taxing the middle class.)
For their part, Republicans know their fingerprints on a tax “compromise” that meets Obama’s demand of at least $1.5 trillion in “new revenue” would cost the GOP the Senate, the presidency, and probably the House. Speaker John Boehner and Senate Minority Leader Mitch McConnell will not allow that to happen.
Official Washington is having a pretend conversation about how a “grand bargain” might be struck during the lame duck. This is to fill newspaper columns and justify ridiculous salaries for K Street lobbyists. The reality is that the November election will strengthen one party or the other: the Republicans, who will control the Senate and/or presidency; or the Democrats, who will have a re-elected president and have no need to maintain a pretense of moderation. Whatever happens on Election Day, neither party will be able to have its way until after January. And then the winning party will.
THE REPUBLICAN STRATEGY is to vote before November to extend all the disappearing tax cuts for one or two years, which would allow (hopefully) a Republican House, Senate, and president to enact tax reform in 2013. Democrats cannot block this legislation in the House, but they can and will stop it in the Senate. Nothing will pass.
Democrats will claim they want to permanently extend many of the Bush tax cuts for everyone except the rich. This might have worked as an argument, except that in 2009 and 2010, Obama, Reid, and Pelosi woke up each day and did no such thing. Why should voters believe that the president truly wants to permanently continue any of them, given that when he had the power and control he chose to extend none?
All this leads to a single point of focus: Tuesday, November 6, 2012.
Smart politicians have perfected the art of separating tax hikes from Election Day with as much distance as possible. This is why tax day, April 15, lies far from the first Tuesday after the first Monday of November.
But the Democrats have made a big mistake. This one time, Election Day sits only 56 days from a $500 billion tax hike, and the only way to stop it is to re-elect a Republican majority in the House of Representatives, add at least four Republicans to the Senate, and install Mitt Romney in the White House. Then, through reconciliation, the House and Senate can extend the lapsing tax cuts for one year, enough time to pass a real revenue-neutral, Reagan-style tax reform, like the one outlined by Rep. Paul Ryan, which drops the personal and corporate income tax rates to 25 percent.
A vote for Obama is a vote for an immediate $500 billion tax hike and the long term continuation of Obama’s downward path toward the fate of Europe.