Are Income Tax Hikes Inevitable?

More On Tax Planning

from The Advisor's Professional Library
  • Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
  • Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.

The rich are protected like “spotted owls” and other “endangered species," wrote Warren Buffett in a recent New York Times op-ed piece. And despite Republican assurances that they will not approve any tax increases, they may be inevitable.

Buffett says that his effective tax rate is far lower than anyone else's in his office. Citing the sacrifice of the poor and middle class who fight for the U.S. in Afghanistan and who are struggling during the halting post-recession recovery, Buffett says Washington spared him and his billionaire friends when it called for "shared sacrifice" in the recent debt limit discussion.

Although his federal tax bill last year was an astounding $6,938,744, Buffet notes that his tax rate was only 17.4% of his total taxable income. He compares his tax burden to that of his employees, whose tax rates range from 33% to 41%, with an average of 36%.

Countering Republican claims that raising taxes on the rich will halt growth, he says that in his 60 years of working with investors, he has never seen anyone "shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

Buffett recommends that Congress raise taxes on those making more than $1 million, including capital gains and dividend tax rates. He suggests an additional increase for those making $10 million or more, noting that only 8,274 people made $10 million or more a year in 2009.

Recent events may make it difficult for Congress to resist Buffett’s call for higher taxes.

When Standard and Poor's downgraded the U.S. credit rating earlier this month, it hinted that it had previously assumed the Bush tax cuts would be allowed to expire at the end of 2012. But in its downgrade announcement, S&P said that it had changed its assumption “on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues." Presumably, this means that Republican reticence at tax increases played some part in the S&P's assessment of U.S. fiscal health.

Sen. Harry Reid, D-Nev., the Senate majority leader, says he believes that Republican insistence on spending cuts without tax increases could be the downfall of the deficit reduction process. "If there's continual talk by Republicans in the House and the Senate that there will be no new revenue, then there will be no bill,” Reid said on NPR. "They have to understand today, right now, the day that we passed the bill, that they will have no legislation that will come out of that joint committee unless revenues are part of the mix. It's a fact of life.”

If the deficit reduction committee is unable to present a bill to Congress, mandatory spending cuts will kick in, including cuts to defense, Medicaid, and farm programs–something even the Republicans are loath to allow.

Not all Republicans are confident about keeping taxes at their current levels. Mike Lee, R-Utah, a Tea Party supporter, admitted on Fox News that "certainly, tax increases could be something that we could face."

The speaker of the House, John Boehner, R-Ohio, claims that the supercommittee cannot approve tax hikes—an active tax increase. But what the committee can do is allow taxes to increase by letting the Bush tax cuts expire at the end of 2012. That inaction would reduce the deficit by up to $3.5 trillion over the next decade, according to some analysts.

Although Congress is unlikely to allow all of the cuts to expire, it is easy to imagine how the Deficit Reduction Committee could allow the Bush tax cuts to expire for the highest earners, while keeping them in place for middle-class taxpayers.

President Barack Obama is certainly in agreement Warren Buffett on tax increases for the wealthy. He has insisted that the supercommittee combine entitlement program cuts “with revenue-raising tax reform that asks for the most fortunate Americans to sacrifice."

Other than a Republican sweep in the next election cycle, it’s hard to imagine a scenario where taxes will not increase before the end of 2012.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.

See also The Law Professor's blog at AdvisorFYI.

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.