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Taxmageddon and Why Should You Be Concerned

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Remember Carmageddon? This was the closure of the 405 freeway in Los Angeles that was supposed to lead to unprecedented problems? How about snowmageddon? The epic size snowstorms that got their name in 2010 and led to a lot of snow but far less than the apocalyptic event that some believed would happen.

There’s a new “mageddon” making its way through Washington and this time, the fallout could be huge. It could stall the economic recovery and cost the country as much as $500 billion in lost economic activity in 2013 if the full effects come to pass. The mageddon is Taxmageddon and there’s no doubt that it’s something for Washington to worry about, especially in an election year.

What is Taxmageddon?

Taxmageddon is what would happen if the tax extensions that Congress has approved as well as other lesser known tax breaks expire on December 31st. First, the Bush-era tax cuts, which define our current tax brackets, which cut the tax rates on investment, estate, and gift taxes, are set to expire on that date. Additionally, the marriage penalty for joint filers will once again be a reality and the child credit would drop to $500 from $1,000 where it is today.

According to The Washington Post, the rate that Americans pay on their first $8,700 of income will go to 15% from 10%, and the Social Security tax will rise to 6.2% from 4.2% and for higher income individuals, the Medicare taxes enacted for Obama care will become a reality.

Finally, Congress has passed a series of patches that keep the alternative minimum tax from striking an even larger amount of middle income earners. Many have called for a large scale reform of the alternative minimum tax but that doesn’t seem likely which would necessitate another patch being passed in a Congress that has a shown an inability to get the smallest and least controversial matters passed.

Will it Happen?

The Obama Administration as well as congressional Republicans agree that such a substantial tax hike can’t take place but to what degree is likely to be the subject of a large Washington battle in starting in November following election season.

Obama has said that he will veto any bill that extends the Bush era tax cuts to the wealthiest 2% of Americans but Republicans, who have been against tax hikes for anybody, may have to agree to set this stance aside in order to pen a deal. 72% of Americans are in favor of higher taxes on the nation’s wealthiest giving the Democrats a stronger position going in to negotiations. Lawmakers agree that the national debt has to be brought under control but they also know that taking money out of Americans who are earning less than they once were, could have serious economic ramifications.

Finally

Most “mageddons” end up being much more subdued than the doomsday prophets would like us to believe and while the chances seem unlikely that Washington would risk the economic and political fallout that would occur if all of these tax hikes were allowed to take hold, most agree that taxes for at least the higher earning Americans will likely rise and even the middle class households may not enjoy the same breaks they’ve seen for years.

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17 Responses to “Taxmageddon and Why Should You Be Concerned”

  1. As long as we can see it coming and can prepare for it – I have no complaints. It’s bound to happen eventually.

    Plus, I try to remind myself that more taxes paid will = more/better services and road/city maintenance and development etc. The money has to go somewhere.

    • pmulroy says:

      Actually, most government spending in the future will consist of simply taking your tax dollars and giving them to someone else via entitlements such as social security, medicare and medicaid. Increasing taxes without drastically reforming these programs will be a disaster and would only result in prolonging the unsustainable path they are currently on.

      In short, the money will definitely go somewhere, just don’t delude yourself into thinking it will be buying you more/better services/roads/etc.

      • Most of the spending now goes to entitlement programs. As years pass, that amount will simply increase more and more.

        Personally, I have no issue paying taxes. The problem I have is that the government doesn’t use the money in ways that I feel are appropriate.

  2. David M says:

    I say let them All expire!

    We have to start paying for all the “free” services have been getting sometime and I say why not next year.

  3. Diane says:

    They are overdue to expire. We cannot pay for what we now spend, and tinkering around with “entitlements” won’t change that as the bulk of our spending is on the military. Let them expire, and for God’s sake don’t fan the fires of partisan nonsense by calling it “taxmageddon.” It’s simply an expiration of something that was always intended to be a temporary thing.

    And yes, I’m in a high tax bracket, subject to AMT AND I run a small business, and I still think this whining about taxes is a lot of nonsense.

    • freeby50 says:

      “the bulk of our spending is on the military”

      If you look at all federal spending then the defense spending is only about 20%.

      For fiscal year 2011 the total for defense is $700 billion. Medicare/medicaid cost $854 billion and social security was $725 billion. Total spending was $3,598 billion.

    • pmulroy says:

      Diane,

      Would you be so kind as to look up how much of the federal budget is spent on entitlements such as medicare/medicaid/social security? And then would you look up how much this spending is projected to increase as our population continues to age? I think you’ll be in for a surprise.

      I’ll admit defense spending is another huge chunk of the budget and could use some fat trimming, but at least you can make the argument that having the most advanced military in the world provides a benefit for everyone.

      Entitlements on the other hand are simply taking a dollar from one person and redistributing it to another person. Not exactly where I want my tax dollars going.

  4. Fabclimber says:

    Anyone who thinks that those in Congress will raise taxes on wealthy Congressmen has a serious problem. I don’t know what that problem is, but I bet it’s hard to pronounce.

  5. Barry says:

    The Bush tax cuts + unnecessary wars fought with borrowed money are the main causes of our national debt. By simply winding down our wars, avoiding new wars, and letting the temporary(?) tax cuts expire, congress and our next president could make major progress toward balancing our budget.

  6. Ben says:

    It is disappointing that the Marxist style class-warfare rhetoric is working on 72%(?) of Americans. Go ahead! Tax the 2% into bankruptcy and it will not even make the smallest dent in the interest alone on our national debt! More taxes mean more rewards for irresponsible government spending by politicians who have lost touch with reality.
    History is clear: More government spending and programs result in more social problems that form the basis for more government spending and programs. Where does it end? The debt wall.
    The debt ceiling was created to keep us from hitting the debt wall.
    See Debt wall . org
    “The world has less than 18 months until we hit the — that moment when the world runs out of enough liquid capital in the entire world to fund the deficits being run up by governments.

    Once we hit that , our lives will change radically — and for the worse.

    Raging interest rates … hyper inflation … massive unemployment, unprecedented bankruptcies … a chilling extension of government control over our families, our communities and our economy … all these outcomes and worse are likely.

    The media, the politicians, the business leaders in our country either don’t understand just how much danger we’re in, or worse, they know and they’re not telling Americans the truth.”

    • sincerely says:

      couldn’t agree more..

    • NateUVM says:

      Couldn’t disagree more. Pretty sure that this was NOT the scenario prior to the 80′s when the highest marginal tax rate was 70%.

      No, the problems we have are due to the fact that we have unsustainable growth in how much of our GDP we have in debt. If we could stabilize (not even eliminate!) our deficit spending, we would be fine.

      Ironically, studies have shown that not having ever gotten involved in Iraq or passing a “certain administration’s” tax cuts would have, despite the economic downturn caused by a reluctance to regulate, been enough to stave of our current budgetary mess.

      No, we need to go back to a scenario where people are actually paying for the safe harbor and economic protection that the poor are providing everyone else in this country with their blood (military service) and working without safety nets (social welfare and/or access to sufficient health care).

  7. Ben says:

    The current national deficit increases by $40,000 per second! Tax the 2% into bankruptcy and you will not even touch the interest on the debt.
    The debt ceiling was in place to prevent our hitting the debt wall. Since we keep raising the ceiling as if it means nothing and vilify anyone who warns against it we will hit the debt wall this year unless drastic measures are taken.
    The Marxist style class warfare has influenced 72%(?) of people into believing that we need to tax rich people more and that is the solution. No one who understands the problem would ever believe such nonsense.

  8. rlaw100 says:

    I don’t mind if we get a tax hike, I feel like taxes have been at an all time low for some time now, if we keep on passing the National debt to the next generation there’s going to be substantial problems later on.

  9. Diane says:

    @pumulroy: No, I don’t think it’s been much of a benefit to anyone in a long time. NATO is certainly useful, and keeping some nimble capacity is definitely useful, military engineering ditto. But given the profligate spending on two wars over the past decade – paid for not with war bonds, not with taxes, and not even shown as a line item in the budget – I simply cannot say it’s in any way been worth what we spend on it. We’ve squandered it over the past decade, and hidden its true costs from the public. While it is certainly an important thing, it needs to be cut.

    If we dialed it back hard, raised taxes and cut SS and Medicare then we would be in not bad shape. But taxes do need to go up. How do people THINK wars are paid for – the war fairy?

  10. sincerely says:

    My question is why do people consider Medicare a benefit like a handout when it’s for those who are disabled or elderly in general? Why do people want to cut off those who are unable to survive without it? Seems like people would want to cut out things like wasted dr. visit costs,food stamps to all the people coming in from other countries to get handouts, etc. Not, to those who already at one time worked hard for their families and now are unable to and their children aren’t able to support them.

  11. Rachel says:

    I find it extremely laughable that people think taxing the heck out of the rich will solve all our problems. The rich got rich for a reason and will stay rich, even if it means taking it out of the backs of the middle class and poor. They will pass down their tax hikes to us, in turn WE will end up paying more for every day things. How about instead of hiking taxes, FIX the spending problem. The government needs a complete overhaul in its financial management, starting from the ground up. Putting small band-aids on big gaping wounds will not work.


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