Debt Free

What happens if the Bush tax cuts “for the wealthy” expire, which would make many members of Congress giddy as a 12 year old girl at a Jonas Brothers concert? Entertainment preferences of our Nation's youth notwithstanding, the day after the last of you stragglers sent off your taxes is a great time to revisit such tax related issues. What happens if those Bush tax cuts do expire? Who really cares how they affect the wealthy, I'm selfishly more interested in how they'll affect the average American. After all, if they're “for the wealthy” the cuts or lack of them won't really affect me (or most likely you either) all that directly anyway.

What happens to most of us with regard to how much we'll pay in Federal income taxes if Bush and his tax cuts go sailing off into the pages of history?

First a side note: Government spending is out of control, and has been for some time. Lest you think I'm just a (to use an expression usually reserved for those on the far left) Cool Aid drinker, government spending under the Bush administration has been totally out of control, to the tune of 19.6% in 2006, with a 2.1% budget deficit. In 2000 it was 18.4% of GDP and we had a 2.4% budget surplus. Even more frightening is that according to a CBO report, it's projected to swell to 23.8% of GDP by 2040 and even higher after that. Interest expense will grow to chilling (to our economy) numbers in the future if current trends aren't reversed. Eventually the CBO predicts that interest on federal spending alone will consume a greater amount of the budget in percentage of GDP than our entire budget does now!

Why don't we just surrender all our salaries, wages, and bonuses to the Federal Government and allow them to dole out to us what they feel we “need” to exist on. Oh wait, that's been tried. It was the dismal economic and social failure known as Communism. Hopefully most of you that read personal finance blogs at least aspire to some upward mobility, and aren't satisfied with remaining where you are. Why would you be so fired up to be penalized for working hard and bettering yourselves?

Taxes are a necessity of civilized society. After all, roads, bridges and other infrastructure need to built, and we must defend ourselves, but why should those that actually get up early create the wealth, jobs and technological wonders that allow us to have this level of prosperity be forced to pay for nearly all of it?

When the Bush tax cuts expire in 2010 as they're scheduled to:
Well, the Center on Budget and Policy Priorities reports that extending the Bush tax cuts and AMT relief would cost $4.4 billion. Cost who? Certainly not the tax payer. Sounds like the tax spenders are getting a bit testy, because from where I'm sitting that sound like it would save you and I money. It's all a matter of perspective on whose money it really is, anyway. I guess some feel that because they print the money it's really theirs and they're just loaning it to us. I'll bet that not all of the projected 33 million American taxpayers projected to be snared by the AMT in 2010 feel like they're wealthy. But why reform it? After all, it would contribute to the $4.4 billion that they feel we're not really entitled to anyway.

On the expiration of the “Bush” tax cuts, the tax brackets will change as follows:
Brackets 10, 25, 28, 33 and 35 percent will be increased by 50%, 12%, 10.7%, 9.1% and 13.1% percent, respectively, to 15, 28, 31, 36 and 39.6 percent. Those of you at the bottom of the tax barrel will see a 50% tax increase. Still think that those tax cuts are strictly for the wealthy?? Well, have a nice day then. The child tax credit will be cut in half (damn those wealthy families with children) so in reality, the upper and lower classes benefited the most from the tax changes, with the lower class receiving far and away the largest benefit. Yet, we seldom hear this in our daily news osmosis. The phrase “tax cuts for the rich” has been repeated so many times that the majority of the sheeple simply believe it.

The funny thing is that many of the truly wealthy will be little affected by income tax hikes, because their income is derived from investments (taxed at the capital gains rate), and their property is in trusts, or actually owned by their businesses. The psuedo-wealthy that make $250,000 and up actually pay the vast majority of the taxes, so if you're going to cut taxes, that range offers the largest opportunity to do so. For those of you that think only the rich own stocks, you're wrong. 91 million Americans own shares of stock, thanks largely to 401k plans and IRAs, so boosting the market helps their retirement picture. In fact 90% more people in the bottom 20% of income earners own stocks now than they did 15 years ago.

Finally, do any among you think that as they economy slows it would be prudent to raise taxes? Why exactly would raising taxes (and it's scheduled to be a large raise) help get the economy back on track? Are you sure about that?

The reality is that you can't cut taxes forever and have total tax revenue rise, just as you can't raise them forever and have total tax revenue rise. To low and the reduction in tax revenue will overtake the rise in the economy; too high and the decline in the economy will overtake the rise in revenue. There's a sweet spot in the middle where nearly everyone pays, the economy is suitably stimulated and things get done. Lets find it, without spending so much damn money on bridges in Alaska.