As the markets continued to waiver sideways for the first eight months of this year, one of the major roadblocks that’s keeping the economy from turning around is the uncertainty of future tax rates. Most wealth managers know that the 2001 and 2003 Bush tax cuts are set to expire at the end of 2010. Therefore, unless Congress acts to extend or change the current tax rates, most Americans will see at least some increase next year. The simplistic analysis shows that the current 10%, 15%, 25%, 28%, 33% and 35% tax rates will jump to 15%, 28%, 31%, 36% and 39.6%, if the tax law sunsets. Based on projections from FiveCentNickel.com (which are estimates calculated from the 2010 tax rate brackets plus 3% inflation), here’s a quick breakdown of the possible 2011 tax brackets.
To me, the economics are pretty simple. The more money someone has to spend, the more they’ll spend, and the less money someone has to spend the less they’ll spend—unless it’s the government! If 70% of our gross domestic product is based on consumption, then how in the world would anyone think that increasing taxes is going to prompt taxpayers to continue consuming—or even consume more? In my opinion, it’s ludicrous for the government to increase taxes on anyone and then expect our economy to get stronger!
So I decided to look at the historic charted data from the National Taxpayers Union to find out who is really paying the total tax bill. Not to my surprise, according to their statistics, reality was definitely different from what we hear from Washington every day. The data shows that the top 25% of American income earners (those with an adjusted gross income threshold of just $66,000/year) have consistently paid 82% to 86% of all personal federal income tax collected between the years of 1999 to 2007. The table below illustrates the breakdown for 2007:
Imagine—86% of all personal income tax revenue our federal government receives comes from just one-fourth of American taxpayers! So then, if consumption is typically 70% of our gross domestic product, what group is doing that spending? Is it mostly the same top 25% of American income earners? If they have less money to spend, will they’ll actually be willing to spend more—to do their part to help the economy? I’m not a gambling man, but I would bet otherwise.