2013 Tax Increases: Expect Your Taxes to Skyrocket
I’ve never personally cared for the practice of New Year’s resolutions. In my observation, most people don’t come close to living up to their goals. Moreover, if something is worth improving about yourself or your circumstances, why not take notice and do something about it no matter the day of the year? But in the spirit of the New Year, I’ve identified one resolution that we all will have to make whether we like it or not – to fork over more of our money to the government.
Events have conspired to make 2013 the year of the tax hike. As of writing this, a deal has emerged to avert across-the-board tax hikes as part of the “fiscal cliff.” Assuming it is finalized as reported, that means income tax rates won't be going up for all income brackets. As predicted, Republicans caved in the deal and offered tax hikes on the wealthy in exchange for vague promises of future spending cuts – essentially nothing. But regardless of how the “fiscal cliff” is resolved with the final votes later today, taxes are slated to go up in 2013.
Obamacare included a number of taxes to pay for its new spending, many of which take effect in 2013. The most notable is a 3.8% surtax on investment income for top earners, which like all taxes on capital formation will negatively impact everyone through reduced economic growth. Also included is a hike to the Medicare payroll tax, a higher threshold before which those with significant medical bills can deduct their expenses, an excise tax on medical device manufacturers, and a cap on contributions to flexible spending accounts.
Unfortunately that’s just the tip of the iceberg. Everyone’s payroll taxes will be going up by 2 percentage points with the expiration of the two-year holiday.
Hidden taxes are also taking their toll on economic prosperity. By holding interest rates to artificially low levels in order to reduce government interest payments on the massive national debt, and thus making the deficit look smaller than it really is, the Federal Reserve is implicitly taxing all Americans who otherwise would be earning greater interest on their savings. That’s on top of the Fed’s longstanding hidden tax through inflation, which reduces the purchasing power of every dollar by approximately 2% per year.
These are just some of the upcoming taxes of which we are currently aware, but more is guaranteed to be on the horizon if federal spending isn’t brought under control.
All government spending is financed by taxes, whether they are collected today or tomorrow. Debt is just spending that hasn’t yet been paid through taxation, but it can’t be put off forever. Eventually debt must be paid. Our current trajectory of massive spending growth, and the dearth of politicians in either party serious about restraining government, suggests that day will come sooner rather than later.
When the day comes that we have to pay up on our debt, it won’t just be the rich saddled with the burden. We are well past the level of government that can be supported by the few at the top. The truth that politicians won’t tell you is that the rich just don’t have enough money. A 100% tax on every millionaire would only fund the government for 3 months, and that’s a trick that only works once.
The U.S. has the most progressive tax system in the developed world, as the big government European nations have figured out what we haven’t: You have to soak the middle class if you want to fund a large welfare state. They rely heavily on regressive VATs to fund their big spending, and some US politicians are already eyeing the same to support our bloated government as well.
Will 2013 be the year spendthrift politicians succeed in soaking the middle class with a VAT or other regressive and destructive tax, or will they finally reverse course and slow the runaway growth of government spending?