Many people expect that taxes have to rise especially since the Government has been borrowing billions to rescue the economy.  Due to this, a growing and ballooning deficit has taken its place. With the implications of this growing deficit obvious to everyone, those who govern will be looking at all areas to reduce this indebtedness. Raising revenues ’should’ be high on the Government’s agenda especially with impending expenditures of Social Security & Medicare as baby boomers retire.  Because of these factors either programs have to be cut or  taxes will have to rise.

Monday’s WSJ article titled “To Fix Deficit Tax Man Must Knock on Many Doors’ looked at three scenarios for taxes:

1) Proportionally raise all rates

2) Proportionally raise rates on the top three categories

3) Proportionally raise rates on the top 2 categories. (Note: this is an Obama pledge – to not raise taxes on those making less than $200K. So the first two options violate that pledge).

Under scenario 1, The Tax Policy Center found that Washington would have to raise taxes by almost 40 percent to reduce – not eliminate, just reduce — the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate may jump from 10 to nearly 14 percent, and the top rate from 35% to 48% percent.

Under scenario 2, the top three rates would jump from 28% to 52.6%, 33% to 61.9% and 35% to 65.7%. It should be noted the Tax Policy Center looked at two other scenarios: 1) eliminate itemized deductions or limit the value of said deductions to 15%. They found that neither one would generate enough revenue to meet the deficit.

Under scenario 3, the top two tax brackets would increase from 33% and 35% to 72.4% and 76.8%, respectively.

WSJ TAX MAN COMETH ARTICLE

While many  find it inconceivable that we will end up under scenario 3, let us not forget that until JFK’s tax cut in the early 60’s, top tax rates were over 90%.  JFK’s tax cut brought it down to 70%.  Reagan’s cuts then brought it down to 50% and eventually 35% in 1986.  I would expect some combination of higher income tax rates, especially on high income earners combined with a Value Added Tax (VAT tax). VAT taxes have been used by many countries for many years so we can expect them here to help battle the deficit, entitlement spending and runaway social programs.

An interesting calculation I just saw  is by Steve Dudenhoeffer and it shows each individual citizens share of the deficit.  But wait!  This is different because it shows  how this measures out based on WHO actually pays taxes.  Remember, only about 1/2 of all Americans pay taxes.
http://politicalponderer.blogspot.com/2009/10/how-much-do-you-owe.html

So what would I recommend if  someone  made me in charge of the government?  Here’s The Financial Coach’s approach.
1.  Cut Corporate tax levels to 10% but  only if the company employs a certain percentage of their employee’s in the US.  This would return jobs to America that have left our nation due to higher labor costs, legal costs, Gov. Regulation costs and taxes.

2.  Establish a national Flat Tax along with a National Sales Tax and cut capital gains taxes to 10%.  By simplifying the tax code more revenue will be collected and overall productivity will increase since taxpayers will not be ’stressed’ with trying to fill out tax forms, maintain records and etc.  A NST would provide additional revenue and a lowering of the capital gains rate will INCREASE new businesses, development, and investment.  This means jobs and wealth creation.  Obstacle: Government and Tax Professionals that depend on taxes for a living.

3.  Decrease Government regulation on businesses.  Big Business is actually ‘dependent’ on Big Government to help drive COMPETITORS out of business.  A large company can absorb the cost of legal teams and regulation while smaller companies are stymied and driven out.  Let the Free Market Rule and Reign.

4.  Change Entitlement Programs:  Maintain current promised benefits for retiree’s and future retiree’s 54 and older.   Increase the retirement age for anyone under 53 to age 70 for full retirement benefits from Social Security.  Eliminate early retirement benefits except in the case of medical or health conditions.  OBSTACLE: You name it.  Win support from retiree’s by keeping benefits in tact and win support from younger people by making SS private investment accounts.

5.  Begin a new education policy that creates a system in which anyone that drops out of school or fails miserably can never be eligible for housing assistance, medicaid or other government programs.  End the cycle of dropping out only to be on the welfare roll for life.

RYAN: Right now we’re at about 24.7 percent off, just doing that off the top of my head. This bill takes us to about … $2.4 trillion over the ten-year window when you really look at its true costs. That’s a big number on top of there. I think what this does is freezes in place the 25-percent level and then grow up from there. As you probably know with the current projections using CBO’s model shows us within about 20 years, we get to about 35 percent of GDP and in 30 years 40 percent and then take off like a rocket. So this just accelerates that trend where the government actually doubles in size by the time my three kids are my age.

KUDLOW: Doubles in size? Doubles in size.

RYAN: The government doubles in size as a share of GDP by the time my five, six and eight-year-old in my age. I actually had CBO run the numbers for me on the tax rates. Ten percent bracket for low income pairs go to 25 percent. Middle income to 63 percent and the top rate goes to 88 percent under the CBO scoring. We will kill our economy if this is the path we go down. That’s before you count this new health care entitlement on top of it. What we’re doing is creating a new entitlement saying anybody who makes less than 100 grand, if you consume more than 2 to 9.8 percent of health care expenses as a fraction of your income the taxpayer will pay the rest of it.

Smart Money Magazine had a great article describing all the in’s and out’s of the tax credit so please refer to the link below to view the article.

http://www.smartmoney.com/personal-finance/taxes/10-Things-You-Should-Know-About-The-New-Homebuyer-Credit/?cid=1228

So what do you do?  Plan for it and use strategies to minimize the impacts of taxes.  Also, understand that taxes and tax planning are a continual item and your investment professional should be the one advising you–not the tax accountant who only sees the taxes after they are completed and are ready to be filed.

http://online.wsj.com/article/SB125694593227919879.html