I suppose you should be grateful, not grumble, as you prepare to send a check to Uncle Sam by April 15 this year (that’s Thursday, by the way). Regardless if it’s the elimination of the Bush tax cuts or new taxes on carbon or health care, your taxes will rise in the coming years even if the economy improves.
It’s a trend that actually started over a year ago when the president increased the federal tobacco tax on a pack of cigarettes by 62 cents to $1.01 (the largest bump in history), breaking a bedrock campaign promise that anyone making under $250,000 “will not see any of your taxes increase one single dime." The “tanning tax,” a 10% charge included as part of the health-care bill that will start being collected on July 1, also directly violates that pledge.
Bearing the largest brunt will be upper-income earners, who, even going back to Bush’s “stimulus checks” in 2008, have been directly excluded from virtually every single government economic initiative passed in the past two years. The tax cuts and credits in the stimulus bill, for example, specifically phased out upper-income earners.
These individuals already pay the vast majority of taxes, with a recent study from the Tax Policy Institute indicating that the top 10% of earners shoulder nearly 73% of the entire income tax burden.
While we tend to imagine the “upper-income earners” to be like Scrooge McDuck, the comic-book miser who bathes in a room full of gold and jewels, the fact is that, by definition, the are precisely the productive and entrepreneurial prime movers who create the innovation, jobs and wealth of a thriving economy. That includes everybody from the local shop owner to the Fortune 500 CEO. The wealth they create is earned by providing a value, not via government subsidies or corporatism.
Who’s Getting Soaked?Source: The Tax Foundation
A recent WSJ.com story cited a frightening scenario by which, absent significant spending cuts, the tax rates on the upper two tax brackets would have to rise to over 72% in order to reduce the deficit to a sustainable 3% of GDP.As it currently stands, the tax system, all three million words -- is virtually impenetrable without professional assistance, precisely the reason Americans spend 6.6 billion hours, and $200 billion, on tax compliance, simply figuring out how much tax they actually owe. Consider that the market capitalization of General Electric is also around $200 billion, meaning that the expense of paying taxes, not even the taxes themselves, amounts to the value of one of the world’s largest companies…year after year after year.
Even working with an accountant, it’s hard to imagine any other area of law that is so subjective and arbitrary.
Why is it if you sell an investment for 360 days, it’s taxed at one rate, but if you sell it after 365 it’s taxed at another rate, incidentally, all which will have changed no fewer than three times since 2003?
Why is it that if I take a friend out to dinner and we talk about movies, it’s a personal expense, but if we talk about my investment firm, it’s considered “business” (and taxed accordingly)?
And why is it one accountant’s preparation of your taxes could result in owning one amount while another accountant could easily come up with a different figure?
The upshot is that fulfilling one’s tax obligation, especially if you’ve actually earned any money, is a cumbersome and expensive paper shuffle, costing 20 cents of compliance expense for every one dollar collected in taxes and specifically punishing the individuals whose productive efforts create the most wealth.
As the bills for new entitlements and record deficits come due, you’ll see a thriving racket in hiding assets, navigating tax loopholes and creating legal structures to disguise gains. The tax gap, the $350 billion of taxes legally owed but not actually paid, will also climb.
Looking further out, our primordial tax system could prompt an exodus of capital, as savers and investors alike opt to move their assets to more profit-friendly locales. It’s a course that was already widespread in Europe even before the credit crisis hit, especially among well-known high-income earners such as U2 and the Rolling Stones.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
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