Tax Hikes Are Coming—for Everyone

04/30/2009 9:33 am EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says more tax increases are in the pipeline, and they won't affect just the "rich."

Think taxes are too high now? Just wait. Congress is all but certain to raise them.

Tax hikes will smack firms and individuals-and not just couples making over $250,000 a year.

Just squeezing the rich won't yield enough. Eventually, middle incomers will be hit, too.
Round one will start taking effect in 2011.

At that point, cutting the deficit will be the priority. The debt is simply unsustainable over the long term. Higher taxes will be part of an overhaul, an effort to simplify the code around the edges.

It'll have cuts as well as hikes, but more of the latter. Putting everything in a catch-all piece of legislation dilutes opposition to any one unpopular provision.

Here's what's rising to the top of the list:

  • For individuals, boosts in top marginal rates, from 33% and 35% to 36% and 39.6%, respectively.
  • No change in the other marginal rates seems likely, [but there could be] a higher rate on capital gains and dividends-probably 20%, but only for those in the top brackets.
  • Also, [there may be] itemized deduction caps for top earners. [President] Obama's push to cap the value of deductions ran into too much opposition, but by 2011, some curtailing is likely.
  • No estate tax repeal, but the exemption will remain at least $3.5 million-$5 million if the Senate prevails. Unused exemptions would go to a surviving spouse, making the exemption for marrieds at least $7 million. The rate: 45%, same as now.
  • More easings, but no repeal, of the AMT, the alternative minimum tax.
  • For businesses, a mixed bag of changes, but with a higher total tax bill.
  • Higher SECA taxes for owners of S firms and partnerships, by blocking them from skirting self-employment taxes by taking dividends instead of pay in the future.
  • New restrictions on worker classifications so more are treated as employees.
  • Corporations stand to lose a lot: The deduction for domestic production, accelerated depreciation, and incentives for foreign income and for oil production. One silver lining: Congress may agree to lower the top corporate tax rate.

Longer term, anyone making over $100,000 will be at risk of tax hikes. The only other option-deep cuts in entitlements or defense-won't fly politically. One option is to raise the cap, now $106,800, on income subject to payroll taxes.

The increases will make many unhappy. They already see the burden as high, making the point at April 15th "tea parties." Lumping together income, excise, payroll, and other taxes, the average rate paid today is 21c on every buck of income-the same as in 1982, after the Reagan tax cuts, and 2c less than at its [recent] peak, under Clinton. For the top 20% of taxpayers, that effective tax rate is 26c. It was about 24c in 1982.

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