Your Taxes are going up in 2013 regardless of the Fiscal Cliff

At some point, the House of Cards will fall apart. 

America has been operating without a budget since 2011. During that year, the Congress, Senate, and President tried to negotiate a budget, but continually failed because President Obama and the Treasury Department wanted to raise the debt ceiling (Fear Not: the Federal Government has shutdown before and Social Security checks kept flowing). By August 2011, an agreement was reached. The debt ceiling was allowed to be raised to $16.3 trillion, and a "Super Committee" was formed to to address fiscal reform. In the event that the committee failed to agree on a solution, mandatory budget cuts in 2013 would take effect as a safeguard to our economy.

The Super Committee talks collapsed after a short while, and the economy has been running on auto pilot since then.

Now we are approaching the beginning of 2013 and the 2011 budget cuts, now called the Fiscal Cliff, are scheduled to go into effect. Although Ben Bernanke, Chairman of the Federal Reserve, and other economists were concerned that these cuts would trigger a new recession, our elected lawmakers have again failed to resolve this critical issue. President Obama's solution is to raise taxes on those individuals earning more than $200,000 per year and has requested the authority to increase the debt ceiling at his discretion, with an unlimited topside amount. Republicans in the House of Representatives do not want to raise taxes on anyone. And, conservatives want to limit entitlement spending.


In an attempt to bully the Republican Congressmen, the Democratic leadership has led a campaign against the Republicans, convincing the American public that it is the Republican Party who is responsible for failing to resolve the budget issue.

To complicate matters, the Secretary of the Treasury, Timothy Geithner, warned that the U.S. budget ceiling would be reached on December 30th, 2012, just two days before the mandatory budget cuts are implemented. 

Needless to say, the Democrats are beginning to panic at the thought of being constrained by the required budget. This is why President Obama cut his Hawaiian Vacation short and returned to Washington DC yesterday. 

Mr. Obama had campaigned on raising the taxes on the rich. He carefully avoided informing the public that new ObamaCare taxes on all income earning Americans, regardless of income level, would also become effective in the beginning of 2013.

This means that everyone who generates income will be paying more in taxes beginning 2013. The only question is how much more will be paid. If the legislature fails to avert the "fiscal cliff", the Obama give-away program begin to come to an end while all those who are still working will help to reduce the national debt.

If a new budget agreement is reached, current taxpayers will begin to pay these new taxes in 2013 due to ObamaCare:

• Medical-device excise tax 2.3%, paid by elderly, sick, injured, needy
• Limited Flexible Spending Accounts (30 million working Americans) tax deductions for health care costs will be capped at $2,500 rather than unlimited
• Tax deduction for medical expenses exceeding 10% of annual income (up from 7.5 %)
• Increase in Medicare tax from 1.45% to 2.35%
• Tax increase of 3.8% on investment income for those earning $250,000 or more. Capital gains increase from 15% to 20%. Dividends tax rises from 15 to 39.6%. Plus, with ObamaCare, capital gains tax rate raised to 23.8% and dividends raised to 43.4%.
• Employer Payroll tax increase

However, if we do go over the fiscal cliff, all working taxpayers will be subjected to these additional taxes as well (see What falling ...)

• Income of $20,000 to $30,000: $1,064 average tax increase
• Income of $40,000 to $50,000: $1,729 average tax increase
• Income of $50,000 to $75,000: $2,399 average tax increase
• Income of $75,000 to $100,000: $3,688 average tax increase
• Income of $100,000 to $200,000: $6,662 average tax increase
• Income of $200,000 to $500,000: $14,643 average tax increase
• Income of $500,000 to $1 million: $38,969 average tax increase
• Income of more than $1 million: $254,637 average tax increase

So, in summary, our legislative and executive body struck a budget agreement in 2011 which will now become effective in 2013. Taxes are going up on everyone whether we go over the fiscal cliff or not. This goes beyond a Republican verses Democrat debate. The budget ceiling is reached and now the future is here for our President and congressional leaders to begin spending in a rational and responsible manner. The House of Cards is about to fall apart, but the only question is when it will collapse: Now or Later? 

Sources: ObamaCare Taxes

• Five major ObamaCare taxes that will hit your wallet in 2013
• Experts warn about impending Obamacare tax increases
• In 2013, Millions Of Americans Face Obamacare Tax Hikes
• Full List of Obamacare Tax Hikes
• The five tax hikes in Obamacare that most hurt seniors

Sources: Fiscal Cliff

• Reid: Time has run out on ‘fiscal cliff’
• Fiscal Cliff - News, Analysis and Opinion from POLITICO
• The Fiscal Cliff: A Primer
• What falling off the "fiscal cliff" means for you
• Fiscal Cliff 2013: A Timeline Of America's Long Stumble

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Is Obama using Buffett Rule trickery to raise taxes on individuals making $125K or more?

There's an old adage that says:

Figures don't lie,

but

Liars sure figure.

During the past several months, the President of the United States has been running around the country claiming that millionaires do not pay their fair share of taxes. He's championing the "Buffett Rule", which asserts:

• "About 55,000 millionaires pay a lower effective tax rate than millions of middle-income Americans".²
• "President Obama has proposed the Buffett Rule, based on the simple idea that people who make more than $1 million each year pay at least the same share of their income in taxes as middle-class families do" ¹

Then, he switches from millionaires to the affluent, those making $250,000 per year:

• "Instead of giving more than a trillion dollars in tax breaks to the very wealthiest Americans those who make more than $250,000 a year ..."¹
• ".. it makes it affordable for us to be able to say for those people who make under $250,000 a year -- like 98 percent of American families do -- then your taxes don’t go up." ¹

But, actually, he means households earning $250,000 per year and individuals making $125,000 per year. ⁷

So, why is Obama promoting this bait and switch plan?

The answer is two-fold.

First, Mr. Obama needs to receive public support for this tax raising plan. In order to do this, he attacks millionaires because there are there are not many of them, and most people are envious of this successful group. According to various sources (which vary slightly), there are approximately

• 4.6 million households - 4%⁴ (in 1998),
• 5.94 households - 5.08%⁵ (in 2011), or
• 3.1 million individuals⁶ (in 2010),

who can be classified as millionaires. Of these,

• "North American millionaires had a combined wealth of $11.6 trillion"⁶, and
• "40,000 individuals had wealth of $30 million or more"⁶, (2010)

Here we can conclude two fallacies in Obama's logic:

1. Of the 55,000 millionaires that Obama cites, about 72.7% have wealth of at least $30 million, and
2. Since the combined wealth of all millionaires is only $11.6 trillion, it is impossible for this entire group to receive more than a trillion dollars of tax breaks each year.

This all means that by taxing the millionaire group as a whole will not yield significant tax revenue for the Obama Administration to lavishly spend and give away to his donors.

Thus, the second reason for bait and switch. To gain sufficient revenue, Obama must tax a larger group. Thus, he switches his logic to those earning $250K per year. This was best explained by FactCheck.org during the 2008 election:

• "For simplicity, we’ll just focus on the over-$250,000 group. Those reporting adjusted gross income of more than $250,000 to the IRS are projected to make up 2 percent of households next year, when the new president will take office. Those folks will earn 24.1 percent of all income, and pay 43.6 percent of all personal federal income taxes, the Tax Policy Center figures. Under either Obama or Clinton, they might pay even more".⁷

Notice that while this group makes up approximately 2% of households (consistent with Obama's 98% of others), they earn 24% of all income and pay 43% of all taxes.

But, since households usually consist of two or more individuals, Obama must insure individual taxpayers pay their fair share as well, i.e. individuals making $125,000 per year:

• "Joint returns with more than $250,000 adjusted gross income and single returns with more than $125,000 adjusted gross income together are estimated to make up 3.1 percent of households next year. That group is projected to earn 27 percent of all personal income and pay 47.9 percent of all personal federal income taxes in 2009, according to the TPC’s calculations".⁷

So now that the switch is complete, we have increased the taxes of those earning 27% of all income and who pay nearly 48% of the federal income taxes.

Why should you care. All U.S. taxpayers should be concerned about Mr. Obama's Buffett Rule ploy for several reasons:

1. With a minimum of $125,000 income threshold, single older individuals who are at the peak of their earning potential will suffer most (policemen, firemen, teachers, municipal workers, doctors, health care providers, Obama Administration employees, etc). These are people whose spouse may have died, divorced, or perhaps never married.
2. With the $250,000 household income threshold, those with two family members working, and children under the age of 22 who are working or saving for college will be forced to pay higher taxes.
3. The 40,000 individuals worth $30 million or more will simply move their money and primary residences off shore to avoid taxes. 
4. A President who wants to raise your taxes should be blunt and say so directly, not intending to trick the public by pretending to tax one group only.

Aside

As an aside, the President and Vice President released the 2011 Tax returns today. Using the White House Buffett Rule Calculator , we find that:

• the Obama's effective tax rate was 23%, and
• the Biden's effective tax rate was 26%.

Since both of these households paid less than Mr. Obama's proposed Buffett Rule minimum of 30%, we encourage both the President and Vice President to voluntarily making up the difference now by paying an additional 7% and 4% of taxes rather than waiting for an Executive Order.

By doing this, the President would demonstrate that he is leading by example and not rhetoric.

---

Sources:

1. President Obama Makes the Case for the Buffett Rule
2. The Buffett Rule
3. President Obama and Vice President Biden’s 2011 Tax Returns
4. Fewer Millionaires Than Thought in U.S.
5. US States With the Most Millionaires 2011
6. U.S. Has Record Number of Millionaires
7. Americans Making More than $250,000

Your 401K and IRA deduction is targeted and the Government aims at taking it away

The Senate Finance Committee, headed by Chairman Max Baucus (D-Mont) held a session to consider changing the current 401K and IRA tax exemptions. As its underlying premise, the Committee is utilizing The Brookings Institution's newly drafted proposal which aims at: eliminating the current tax deduction for the 401K and IRA contribution; and, replacing it with one of two options in which the Government credits the depositors account with:

• either 30% of their contribution,
• or 18% of the their contribution.

On the surface, their proposal seems reasonable. A casual reader would not believe that they would be affected. However:

Every family or individual 

with an adjusted gross income of 70,000 or greater 

will experience a tax increase 

ranging from $283 to $4,322 per year.

The Brookings proposal contains 2 tables showing this information. The tables are broken down into quintiles of income, which means 20% levels. In their 30% Proposal, those earning less than the top 90% would save on taxes. In their 18% Proposal, those in the lower 80% of earners would save in taxes.

You might say that doesn't affect you. However you would be wrong, because:

• the 80% threshold is about $70,000 per year,
• the 90% threshold is about $113,800 per year,
• the 95-99% threshold is $159,600 per year, and
• the top 1% is $380,400 per year.

If your household tax form income falls within any of these levels, your taxes will increase.

Remember, the top 25% of tax filers pay about 86% of the total taxes received. And, the top 10% pay 70% of the taxes received by the government.

The Brookings proposal shows tax savings for those in the first 60% of tax filers. But, of this amount, nearly 50% pay NO taxes at all. So they won't save anything. Thus, The Brookings proposal is misleading.

The remainder of us who are still employed and earn more than $70,000 per year (per person or family), will pay more taxes, especially if The Brookings 18% Proposal is adopted.

So don't be fooled. Tell your Congressman or Senator NOT to support this masked tax hike!

Sources:

Brookings - Proposal to Restructure Retirement Savings
The retirement myth – 1 out of 3 Americans has no savings or retirement account. Half of Americans have $2,000 or less in their retirement account. 401k new name for Wall Street grease.
Summary of Latest Federal Individual Income Tax Data
Are Democrats Eyeing 401(k)s, IRAs for Tax Hit?

Your military pension is not safe. It might not be paid or may be substantially reduced.

Military pensions are on the chopping block

and

you may lose all or part of your military pension.

The US Department of Defense Business Board (DBB), an advisory board whose mission is to provide independent advice and recommendations to the Department of Defense, has proposed the reorganization of current and future military pensions. In general, they have said:

• Military retirement is more generous and expensive compared to the private sector (meaning we are giving soldiers too much money).
• The current retirement plan is unfair because you have to be in the service for 20 years to be eligible.
• It is unaffordable and inflexible.

So, they want to replace it with a new Defined Contribution Plan in which:

• Soldiers will pay for their own retirement instead.
• Is not payable until 60 to 65 year of age (rather than after retirement)
• Will pay much smaller amounts ($3,600 compared to $24,000 per year for E7 age 40)
• Is mandatory
• Will be similar to a 401K plan (invested in the stock market)
• But, the government will pay some.

Their argument is that all soldiers would be eligible for a Military pension after the vesting period rather than being limited to only those soldiers who have 20 years of service.

However, they fail to highlight that the current pensions are:

• Currently 100% Free to All Soldiers.
• There is no risk of losing this benefit.
• Important factors in military retention.

A review of the credentials of the members of the DBB indicates that many are associated with the Mergers and Acquisition (M&A) industry, including the Chairman and Vice Chairman. The job of the M&A industry is to financially restructure and merge companies. In return, the M&A receives large sums of money. Many other members are associated with money management firms and investment banks. So, their proposal is based on their own self-interest goal of making money off the soldiers retirement income.

The DBB proposal advocates that both the government and soldiers contribute to the new Defined Contribution Plan. This means that someone needs to manage this amount of money. So, all or part would be managed by one or more private investment financial companies who would take portions of the contributions as payment for their services. Under their proposal,

• Career soldiers would receive much smaller pensions
• Money is at risk of being lost in the stock market
• Soldiers would get poorer
• The financial industry would get richer.

I believe that pensions for teachers, policemen, firefighters and soldiers are well deserved. Soldiers in particular do not earn a large amount of money. Making them pay for their retirement would be a financial hardship to them. If this plan was passed by our current administration, it would probably result in an immediate decline in the recruiting and retention of our military forces. Remember:

Soldiers put their life at risk every day

so that we can be safe.

They can be killed at any time.

Their retirement is the least we can do as Americans to say thanks!

You can learn more about this important issue by visiting and reading the sources listed below.

Sources

Military pension reform means an 85% cut for career veterans
Retiree Benefits for the Military Could Face Cuts
Modernizing the Military Retirement System (DDB - pfd)
Defense Business Board - The Members
Radical overhaul of military retirement eyed

Pop goes the weasel (why America is going broke)

All around the Congress' desks

The president chased the taxpayer

Round and round

Up and down

Pop goes the country.

Last week, we discussed the availability of the Federal Taxpayer Receipt which breaks down how our tax dollars are spent. This is a two edged sword because while it helps explain where the money goes, it reveals the entitlement spending that so many are worried about.

To get an understanding of the scope of our debt problem, we need to put hard numbers into the calculator. Using a variety of sources below, we learn a variety of facts. (While many sources use numbers from 2008 to 2011, the exact calculations are not determined. But, we believe that on the average, these numbers provide a good ballpark overview).

• Annual federal spending = $2.4 trillion (source 7)
• Approximate income tax received = 1.032 trillion (source 1)
• 47% of population pay no taxes (source 3)
• Annual deficit shortfall = $1.4 trillion (derived)
• Average tax rate from all people = 12.24% (source 1)
• Average tax rate top 5% from all people = 20.7% (source 1)
• Number of  income tax forms received = 140 million (source 1)
• Average tax paid by individual form received = $7,371 (derived)

Entering the average taxpayer payment of $7,371 into the taxpayer receipt calculator, we identify some startling facts.

• Under Job and Family Security, we pay about $100 billion for supporting a portion of the poor (4.4% goes to unemployment insurance, 3.6% for food and nutrition assistance, 2.2% for housing assistance). This totals to $751 of our individual taxes.
• Approximately 6.5 million people receive unemployment insurance per month (source 6). This means that the country pays about $45.4 billion per year to fund the unemployed (140M * $324 each taxpayer).
• The average monthly food stamp payout is $133 (source 4). Since approximately 35 million people receive food stamps, we pay $4.65 billion per month or $50 billion per year for food stamps to support these people. As $265 is taken from each taxpayer for this, each taxpayer pays for 2 months of someone else's food stamps.
• By comparison, we only pay $20 - $40 billion per year (source 5) for the nearly 1 million retired military and survivors. 

As we can see, a large portion of our tax dollars go directly towards entitlement spending of providing the unemployed and poor with spending money. At the same time, the country receives less than 50% of the money it spends from taxes. This means that we go deeper into the hole every year.

So, maybe President Obama is right: It's time for shared sacrifice.

In order to have enough money to cover our spending, we would need to double everyone's taxes. However, if we do that, those who are working will not have any money left.

Perhaps we can eliminate all the entitlement spending. If we do this, we only save $100 billion which is far from sufficient.

What if we required everyone to pay taxes? This would mean that the 47% who are getting a free ride will have to pay. If we do this, and require all corporations to pay taxes, then just maybe we can begin to get close to having a balanced budget.

Notice that I haven't advocated the government cut spending. While this is logical, the current administration would not consider this, even though it is a shared sacrifice.

Unless we get the economy going by creating more U.S. jobs, more and more people will become unemployed. The annual tax revenue will decline and our entitlement spending will increase. This means the federal deficit will increase.

And, if inflation kicks in and interest rates rise, then:

Pop goes the weasel!

Sources:

1. Summary of Latest Federal Individual Income Tax Data
2. Gov’t handouts exceed taxes as percentage of average household income for first time since 1936
3. Yes, 47% of Households Owe No Taxes. Look Closer.
4. Food stamp list soars past 35 million: USDA
5. Portrait of Retired Soldiers and Spouses
6. Record number getting jobless benefits
7. Federal Debt Ceiling

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Where do my tax dollars go? Find out what the White House says.

In their commitment to bring more transparency to the American public, the White House recently launched its new taxpayer receipt calculator. The intention of the calculator is to help everyone understand where their tax dollars go after they are received. To access this calculator, you can visit their page:

Your 2010 Federal Taxpayer Receipt

To use it, you will need to enter 3 items from your 2010 tax return. These are your: Social Security, Medicare, and Federal Income Tax amounts. After entering, press the "Calculate Receipt" button and the distribution of your tax dollars will be displayed.

The receipt consists of three groups of data. The first two are: Social Security and Medicare Taxes. The output of the receipt for these categories simply duplicates the amounts you enter and provides no other information. So, it is not particularily interesting.

The meat of the calculator is in the Income Tax breakdown section. Using its predefined percents of income, the receipt calculator shows how your tax dollars are allocated across 14 different categories:

1. 26.3% - National Defense
2. 24.3% - Health Care
3. 21.9% - Job and Family Security
4. 4.8% - Education and Job Training
5. 4.1% - Veterans Benefits
6. 2.1% - Natural Resources, Energy and Environment
7. 1.7% - International Affairs
8. 1.2% - Science, Space, and Technology Programs
9. 2.0% - Immigration, Law Enforcement and Administration of Justice
10. 0.8% - Agriculture
11. 0.5% - Community, Area, and Regional Development
12. 0.4% - Response to Natural Disasters
13. 2.4% - Additional Government Programs
14. 7.4% - Net Interest

Based on our first impressions, we must commend the Administration for creating this valuable tool. It provides a great overview of where our dollars go. We encourage all of you who pay Federal taxes to take a look at this tool and get a little more clarity about your tax dollar distributions.

However, like all good things, it can be criticized. For example, there is at least one item missing, and not enough clarity as to many of their descriptions.

Next week, we will take a deeper look into some of the individual line items and explain what we believe is missing.

On the overall, we believe this is a great start and a valuable tool for the American taxpaying population.