April 21, 2011 – Get Ready for Your Tax Hit

Featured Trades: (THE COMING TAX HIT)

2) Get Ready for Your Tax Hit. No matter what anyone promises you today, this week, or this year, your taxes are going up. At $1.3 trillion, the budget deficit is so enormous that bringing it into balance merely through spending cuts is a mathematical impossibility. Chopping funding for Planned Parenthood and National Public Radio just isn't going to do it.

If you own your own home, work for a large company, save for your retirement, earn money from capital gains, and put in a check when they pass the dish around at church every Sunday, you are the biggest beneficiary of the current tax system. You are about to take a big hit. Check out the hit list below, and the tax revenues the death of these tax breaks will raise:

$264 billion– Should those without health care subsidize those who receive it for free from their employers? This is the amount raised by taxing company provided health insurance as regular income.

$100 billion- Should renters be subsidizing homeowners? Kiss that home mortgage interest deduction on loans under $1 million goodbye. Ditto for the real estate market as a whole.

$100 billion– End the tax deductibility of charitable contributions. Should those who don't go to church subsidize those who do? Universities, churches, and political fund raising take a big hit.

$52 billion- Should those without savings subsidize those salting away money for retirement. This is the argument that will be made to end tax deductibility of 401k contributions.

$39 billion- Savings on taxes exempted by the step up in the cost bases for investments inherited by surviving spouses. She doesn't need that McMansion anyway.

$36 billion– Tax capital gains as regular income.

$31 billion- Stop special tax treatment of dividend incomes.

Please note that these most draconian measures only raise $586 billion a year, a mere 45% of last year's deficit. Without raising tax rates, the remaining $714 billion will have to come from cutting Medicare, Medicaid, Social Security, and Defense spending. In any case, I think it will be politically impossible to get any of these changes through the current congress. An energy tax and a national value added tax are on the table.

None of these hikes would be necessary if the economy grew at a 7% real rate instead of 3%. This is why tax rates in emerging countries are so low. But I believe that America's long term growth rate is falling, not rising, and that our budget problems are going to get worse, not better. What happens if interest rates rise for the world's largest borrower?

Of course, we could adopt Mary Meeker's suggestion in yesterday's piece on USA, Inc. and eliminate all deductions, raising about $1 trillion a year. That would involve shrinking the Internal Revenue Code from the current 100,000 pages to a single page, and moving to a flat tax system. The mass unemployment of one million CPA's and 106,000 internal revenue agents alone would be worth the price.

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