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Political battles will take center stage in the second half of 2012, but few loom larger than the scheduled tax increases – "Taxmageddon" – set to take effect in January 2013.
Bush-era tax cuts, payroll tax breaks and other provisions set to expire next year could pack an enormous financial hit, harming the already-fragile U.S. economy and thousands of struggling families. While Democrats and Republicans alike are opposed to letting all the cuts expire, they disagree on exactly what to do about it.
Republicans blame U.S. President Barack Obama and his administration for the stalemate.
Sen. John Cornyn, R-TX, has said Republicans want to extend all of the Bush tax cuts, including the "big-ticket" ones, and even some Democrats support reform of the entire tax code, but "the bad news is that President Obama is missing in action."
"Unless Congress and the president act, January will bring us the largest tax increases in American history-a tax increase of approximately $500 billion," Cornyn said in a weekly radio address last week.
President Obama wants to end the Bush-era tax cuts for individuals making more than $200,000 a year and couples making more than $250,000 annually. The move is aimed to garner more revenue for a government saddled with growing federal debt. The president has said that wealthier Americans are in a position to help.
But Taxmageddon will fall principally on middle and low income Americans because 60% of the Bush tax cuts went to middle- and low-income taxpayers.
Cornyn said in the Republican radio address, "Make no mistake, every single working American will see his or her taxes go up on January 1 absent action. Family budgets will be squeezed even tighter. Disposable income will shrink. And many jobs will be destroyed."
The uncertainty over federal taxes has weighed on the U.S. economy, Cornyn added.
"Raising taxes is the last thing we should do amid the weakest economic recovery since World War II," he said. "Unfortunately, even if we avoid the full "Taxmageddon" scenario, President Obama's health care law also contains a new surtax on investment that will take effect in 2013. This new surtax will hamper small business investment, which is the lifeblood of private sector job creation."
Obamacare and Taxmageddon
The Supreme Court ruling last Thursday upheld Obamacare. The Court ruled that the key individual mandate requiring Americans to have health coverage or be forced to pay a fine is constitutional under the federal government's taxing power.
People will be required to buy health insurance coverage or pay a penalty (tax) if they don't.
Republicans and opponents call the ruling the largest tax increase in U.S. history.
According to Forbes, the average U.S. family income is approximately $50,000. With family healthcare coverage running upwards of $2,000 annually and swiftly increasing, the coverage mandate is in essence a 4% tax on that family, which will be required to make sure every family member has coverage.
Because the cost of coverage will be uniform across all income levels, Forbes notes, the lower the income, the higher the effective tax rate. Obamacare is essentially the most regressive tax in U.S. history, too.
And it'll be in addition to the myriad other taxes imposed by the legislation.
The Full Scope of Taxmageddon
The Heritage Foundation, a research and educational think tank, has said the wave of tax hikes to take effect on Jan. 1 will hit every household, regardless of income. The 15 million American families with an average income of $70,662 can expect an annual tax increase of $4,138.
The 33.1 million Baby Boomers (average income $95,099) will see a $4,223 tax increase. Low income workers, some 53.8 million with an average income of $24,757, will get hit with a $1,027 tax increase. Millennials, the twenty- and thirty-somethings with an average income of $23,917, will get a $1,099 increase, and 33.1 million retirees will experience an $857 increase.
And this is just in the first year. In succeeding years, taxpayers will see even higher hikes.
Business are already preparing for higher taxes by holding off on hiring, as reflected in recent jobs numbers.
Meanwhile, businesses, families and investors are at a standstill, stalling on making important moves and decisions until they know how much they will need to shell out in taxes.
GOP presidential hopeful Mitt Romney has vowed to repeal Obamacare if elected. So taxpayers may have the ultimate say in Taxmageddon when they cast their votes in November.
Related Articles and News:
- Money Morning:
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- Money Morning:
What is Taxmageddon?
- Money Morning:
Obamacare Ruling: Key Takeaways for Investors and Taxpayers
- USA Today:
GOP warns against Obama "taxmageddon'
- The Heritage Foundation:
How Will Taxmageddon Impact You?