Taxes Will Have to Rise – Some Facts, Conjecture and Opinion

Taxes have to rise. Since the Government has been borrowing billions to rescue the economy, a growing and ballooning deficit has taken its place. With the implications of this growing deficit obvious to everyone, those who govern will be looking at all areas to reduce this indebtedness. Raising revenues will be high on the Government’s agenda. Taxes will have to rise and notably The Tax Policy Center had come up with pretty much the same conclusion.

A recent article appearing looked at three scenarios for taxes:

1) Proportionally raise all rates

2) Proportionally raise rates on the top three categories

3) Proportionally raise rates on the top 2 categories. (Note: this is an Obama pledge – to not raise taxes on those making less than $200K. So the first two options violate that pledge).

Scenario 1, The Tax Policy Center found that Washington would have to raise taxes by almost 40 percent to reduce – not eliminate, just reduce – the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate may jump from 10 to nearly 14 percent, and the top rate from 35% to 48% percent.

Scenario 2, The top three rates would jump from 28% to 52.6%, 33% to 61.9% and 35% to 65.7%. It should be noted the Tax Policy Center looked at two other scenarios: 1) eliminate itemized deductions or limit the value of said deductions to 15%. They found that neither one would generate enough revenue to meet the deficit.

Scenario 3, The top two tax brackets would increase from 33% and 35% to 72.4% and 76.8%, respectively.

While I personally find it inconceivable that we will end up under scenario 3, I would expect some combination of higher income tax rates, especially on high income earners combined with a Value Added Tax (VAT tax). VAT taxes have been used by many countries for many years, so they are a known quantity in the industrialized world and they are an easily administered form of taxes on the purchase of goods and services.

The bottom line is that it is time to start seriously preparing ourselves for a new higher tax environment. Talk to your tax or investment professional for further information.

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Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of “On The Money!” which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America’s premier financial and wealth strategists.