Deficit Hysteria Means The Middle Class Is About To Get Squeezed By New Taxes

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If you’re in the camp that thinks the deficit is still a non-issue, and that the US can’t possibly default on its debt, then this will be maddening to you.

Fears over the deficit — almost certainly a medium-to-long-term issue — likely means that the middle class is going to get hit with rising taxes in the very, very short term.

CNN discusses the upcoming expiry of the Bush tax cuts. At one point, there was talk that the tax cuts would certainly be extended for the middle class, but that’s looking less and less certain.

Previously it had been assumed that only those making over $250K would get slapped:

The cost of doing so for everyone would top $3 trillion over 10 years. Making them permanent for families making less than $250,000 – which tracks with Obama’s promise – would cost less but not much less: an estimated $2.2 trillion.

Two prominent Senate Democrats recently told The Hill, a newspaper that covers Congress, that the $250,000 threshold is not necessarily a done deal with Congress.

Sen. Byron Dorgan, D-N.D., who chairs the Senate Democratic Policy Committee, said he didn’t think there was “any magic” in $250,000. Sen. Dianne Feinstein, D-Calif., noted “you could go lower … why not $200,000? With the debt and deficit we have, you can’t make promises to people.”

The 35% income tax bracket is going back to 39.6%

Date: January 1, 2011

Details: Obama plans to let income tax cuts expire for couples who earn more than $250,000, bumping top tax brackets back to the Clinton era. The 33% tax bracket will rise to 36% and the 35% tax bracket will rise to 39.6%.

Middle-class equivalent: NA. Couples who earn $250,000 or less will probably enjoy an extension of Bush Tax Cuts.

The estate tax is coming back

Date: January 1, 2011

Details: The estate tax strangely lapsed to zero in 2010. Obama will right this fiscal error next year with a return to Bush era top rate of 45%... if not Clinton era top rate of 55%.

Middle-class equivalent: NA. People dying with less than $3.5 million (assuming Bush era exemptions) get to pass on their savings without federal taxation.

Long-term capital gains tax going back up to 20%

Date: January 1, 2011

Details: Expect Obama to let tax cuts expire for long-term capital gains, pushing top tax rates from 15% to 20%.

Middle-class equivalent: Also screwed. Only the bottom two tax brackets may escape.

No tax break for dividends

Date: January 1, 2011

Details: With the expiration of the Bush tax cut, dividends will be taxed at the same level as income -- up to 39.6% for the rich. Previously, tax cuts put the rate down at 15%

Middle-class equivalent: Also screwed.

New 28% limit on charitable deductions

Date: January 1, 2011

Details: Couples earning more than $250,000 may be limited in write-offs, including charitable deductions, to 28%. Although this may reduce total gifts to charity, the administration says the limit will close loopholes and raise $291-billion over 10 years.

Middle-class equivalent: NA

Medicare payroll tax is climbing to 2.35%

Date: 2013

Details: Couples earning more than $250,000 will pay an additional 0.9% of their wages to Medicare -- for a total of 2.35%.

Middle-class equivalent: NA

Brand new 3.8% tax on investment income

Date: 2013

Details: Couples earning more than $250,000 owe 3.8% of their investment income in another tax for Medicare. Deloitte says a single taxpayer making $1 million in wages and $100,000 in capital gains income would pay an additional $11,000 into Medicare than he does today.

Middle-class equivalent: NA. Even if the tax applied to everyone, the majority of Americans have practically no investment.

New $2,500 limit on FSA contributions

Date: 2013

Details: Write-offs for medical purchases -- via employer-based flexible spending accounts -- will be limited for everyone at $2,500. Currently, FSA write-offs are variously limited at $5,000 or unlimited.

Middle-class equivalent: Also screwed. And as a regressive tax, the FSA limit will hurt more the less you earn.

Less of your medical expense can be itemized

Date: 2013

Details: Today you can write off 92.5% of certain medical expense. Obama is scaling the number back to 90% as part of Health Care Reform.

Middle-class equivalent: Also screwed. Americans over 65 will get a stay until 2016.

The Cadillac Tax

Date: 2018

Details: This is a tax on insurers -- not individuals -- charging 40% on the part of insurance plans that exceeds $10,200 for individuals. But does anyone really think this fee won't get passed on to individuals?

Middle-class equivalent: Potentially screwed. Analysts say the majority of American health plans would trigger the luxury excise tax.

Value Added Tax

Date: ???

Details: Obama's finance guru Paul Volcker has predicted a federal sales tax, also known as a VAT. This counts as a tax against the rich, although...

Middle-class equivalent: The less your earn, the more pain comes with this regressive tax. An important clause in getting this controversial tax through Congress, however, could be an low-to-middle class tax break.

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