After the Fall

Cato Institute’s Daniel Mitchell compares the deal to a lump of coal as a belated Christmas present to taxpayers. Consider some of the highlights:

  • The top tax rate will increase to 39.6 percent for entrepreneurs, investors, small business owners, and other “rich” taxpayers making more than $400,000 ($450,000 for married couples). “This is Obama’s big victory. He gets his class-warfare trophy,” says Mitchell.
  • The double tax on dividends and capital gains climbs from 15 percent to 20 percent (23.8 percent if you include the Obamacare tax on investment income).
  • The death tax rate is boosted from 35 percent to 40 percent (which doesn’t sound like a big step in the wrong direction until you remember it was 0 percent in 2010).
  • The alternative minimum tax will still exist, though it will be “patched” to protect as many as 30 million households from being swept into this surreal parallel tax system that requires people to use a second method of calculating their taxes – with the government getting the greatest possible amount.
  • Unemployment benefits are extended.
  • Medicare spending is increased as part of a “doc fix” to increase reimbursement payments for providers.

“That being said,” says Mitchell, “ I was expecting the final outcome to be even worse, so this deal almost seems like a relief.”

Leon LaBrecque, chief strategist and founder of LJPR, a Troy, MI firm managing over $470 million in assets, takes a more sanguine view considering the full package of temporary business tax cuts will be extended for another year. In addition, he notes the following as significant for businesses.

  • The tax on capital gains and dividends will be permanently set at 20% for those with income above the $450,000/$400,000 threshold. It will remain at 15% for everyone else.
  • The estate tax will be set at 40% up from the current level of 35% for those with estates over $5million ($10 million for couples), and it will be indexed to infla­tion.
  • The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.
  • Includes a permanent patch fix for the alternative minimum tax (AMT)
  • The payroll tax holiday will be allowed to expire.
  • Two limits on tax exemptions and deductions for higher-income Americans will be re-imposed: Personal Exemption Phase out (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.
  • The full package of temporary business tax cuts will be extended for another year.
  • Provisions for the doc fix, avoids a cut in payments to doctors treating patients on Medicare.
  • Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks.
  • A nine-month farm bill fix will be attached to the deal.
  • The pay freeze on members of Congress, which Obama had lifted earlier this year, will be re-imposed.
  • The sequestration cuts will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense spending.
  • The new tax law extends the ability to make Qualified Charitable Deductions (QCDs) of RMDs directly (or indirectly) to charity.

The critical concern is that the overall tax increase this year falls substantially on small business. Adding in state taxes and the marginal rates in many areas will be in the 50 percent or higher range. It is curious why Democrats claim this will have no effect on investment. Senators managed to stuff subventions to special interests such as wind energy and ethanol industries. Keeping in mind that the purpose of the fiscal cliff negotiations was deficit reduction it’s ironic that the deal increases spending by at least $30 billion. The question remains will there be any political will left to reduce the 35 percent corporate tax rate? Don’t hold your breath.




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