Know New Taxes

I warned before the 2008 election that regardless of the outcome, the reckless borrowing & spending of the Bush years would lead to inevitable deficits and tax increases. As Milton Friedman once said, an unfunded tax cut is a tax increase on our children.

That day of reckoning has been coming ever closer. As the coming year’s proposed budget suggests, tax increases, especially on the wealthy, are here.

$1.4 trillion in new tax revenue over the next decade, heavily weighted to the top of the income scale, has been proposed.

Those of you interested in deficits, accounting, tax policy — or simply are high earners — may want to take a close look at the proposals:

• Top individual income tax rate of 39.6%, starting in 2013 (up from 35%)

• Long- term capital gains top rate of 20%, up from 15%.

• 3.8% tax on unearned income of couples earning $250,000 or more; individuals making$200,000 — is to take effect in 2013 to pay for the 2010 health- care reform law.

• Dividends are treated like ordinary income. Top Federal bracket for some taxpayers = 43.4% (including dividends). Top dividend tax rate is now 15%

• The AMT is replaced with a 30% minimum tax for individuals with annual incomes of at least $1 million.

• The Carried Interest option benefiting hedge fund managers and private equity managers moves to ordinary income rates instead of a preferential 15%

Ultimately, this is an election year manuever that most of the Left expected in tear p1 of the Obama presidency. It is likely to be popular amongst the swath of the public that earns under $100k per year (read most of them), though by no means unanimously. It also seeks to paint the GOP as defenders of the rich at the expense of everyone else.

I suspect there are built in compromise points — the dividend rate wont go up to 43%, but may end up at 20% with long term capital gains.

For more reading on this, see: Bloomberg, NYT, WSJ

This post originally appeared at The Big Picture and is posted with permission.