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Taxes, Taxes, Taxes…

Posted by Larry Doyle on May 28, 2010 10:38 AM |

Uncle Sam wants your money. In fact, Uncle Sam needs your money. How is he going to get it? Any way he can.

Thank you to a loyal Sense on Cents reader for sharing more details about one of life’s two great certainties and how increased taxes will be coming your way. These details are highlighted in a recently released Credit Suisse research piece, Washington Notes:

While many questions have been raised about the ability of the Administration and Congress to find funding for the new initiatives, it is clear that a reduction in current spending alone will not be enough to cover new programs and therefore it will be necessary for the President and Congressional Democrats to rely heavily on increasing taxes.

The federal government’s fiscal house is in disarray, and by all reasonable projections, the budget will continue to grow much faster than the economy over the long run. While there is no shortage of ideas to bring spending under control and tame the overbearing tax code, policymaker’s have been slow to come together and reach an agreement on mechanisms to curb the problem. Many of these ideas, including balanced budget requirements and fundamentally rewriting the tax code, have been around a long time and are available for implementation, but to date, the Congress has taken little action.

The President and Congress will attempt to tackle these problems, but there seems to be little reason to hope for major structural reforms in the short run. The best they will be able to do, and this assumes Congress is willing to go along, is start to turn the massive fiscal ship around and that will certainly be slow going. The options appear very straightforward – significantly reduce spending or increase taxes to pay for new programs. Neither party has shown much of a penchant for controlling spending in any meaningful way, so that leads to the inevitable reliance on generating more tax revenue. There has already been an overreliance this year on “revenue raisers” (aka “pay-fors” and tax increases) to pay for new or expanded programs, such as healthcare (nearly $400 billion in raisers) and job creation initiatives (nearly $80 billion in new taxes), and such actions are very likely to continue well into the future given the daunting fiscal challenges facing the government.

Congress views legislative action to provide middle class income tax relief as well as retroactive extension of the estate tax as measures that must be completed this year. Congress is also keen to pass additional economic stimulus and job creation legislation in the areas of small business tax and green energy tax incentives this year, which will need to be paid for with new revenue raising provisions. Additionally, there is some concern that Congress may try to use the bank tax to finance other tax/jobs bills, despite the Administration’s initial proposed plan to use the funds for deficit reduction (TARP repayment), which could prove politically unpalatable, given the strong desire of Congressional Republicans to use bank fee funds, as instructed by the operative TARP statute, to reduce the federal debt incurred as a result of TARP.

Congress will be somewhat constrained in its efforts to implement costly, broad-scale policy initiatives because the Democratic majority has renewed its pledge to fiscal responsibility going forward. They adopted PAYGO (Pay-as-you-go) rules last year that require revenue offsets (or revenue increase offsets) for new spending programs. Given the pressure placed on them by adopting these budget rules, Congress will be compelled to continue to focus heavily on tax issues this year and likely for many more down the road.

This edition of Washington Notes provides a summary of noteworthy pending tax measures, a detailed analysis of each and prospects for their enactment.

These taxes run the gamut.

1. Business Taxes: Bank Fees, Bonus Taxes, Securities Transaction Taxes, LIFO Accounting, COLI Interest, Earnings Stripping, and Foreign Tax Limitations.

2. Personal Taxes: Ordinary Income, Capital Gains and Dividends, Grantor-Retained Annuity Trusts, Estate Taxes, Carried Interest, Alternative Minimum Taxes.

There will be NO place to hide!! Uncle Sam is coming, and he is looking to get paid . . . whether you like it or not!!

Thanks again to our friend for providing this great piece from Credit Suisse.


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