If it Looks Like a Tax Increase…

Tuesday, December 4th, 2012 and is filed under Blog, Taxes

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There is one inviolable tax fact that class warfare artists in both parties fail to confront.  The top 1% of taxpayers earned 18.9% of the AGI in 2009, yet paid 37.4% of federal income taxes.  Before the recession, their share of the pie reached as high as 40%.  The important thing to remember is that this percentage of their tax burden includes all of the so-called loopholes and deductions.  In other words, even with the full Bush tax rates in effect, or more aptly put, because of the Bush tax rates, the rich pay an even larger portion of the tax liability.

Republicans who speak of capping deductions on the rich without lowering marginal rates would have you believe that the rich are purloining the treasury with their special “loopholes.”  The facts say otherwise. Consequently, any plan to cap deductions would be tantamount to a large tax increase and will make the tax code even more progressive than that of European countries.

What’s even more disconcerting is that they have adopted the parlance of the left by calling for increased revenue while claiming to oppose tax hikes.  There is no way to raise $800 billion in revenue using a static analysis without raising taxes.  If they don’t lower marginal rates, but eliminate many deductions, that will increase the tax burden of those who are already paying 37% of taxes.  If you include the top 2% – those who will be effected by Obama’s tax increase – they pay almost 50% of income taxes.  Again, that number includes all the deductions.

There’s also another inconvenient fact about capping these so-called loopholes.  There is no way to get $800 billion in new revenue without going after the charitable deduction.  The reality is there are already caps in place to limit deductions for higher-income earners.  It’s called the Alternative Minimum Tax (AMT).  The politicians in Washington might not be willing to admit it, but one of the few deductions left over from the AMT for them to cap is the charitable deduction.  As a conservative, I would have no problem eliminating every deduction – including the charitable deduction – if we implemented a 15% flat tax.  But until such reforms are enacted, any further cap on deductions – one which would actually raise the stated amount of revenue – would necessarily hamper charitable giving.

Keep in mind that the Obamacare tax hikes, which are set to take effect next month, will mitigate charitable giving, even without further tax hikes.  Here’s how Chris Jacobs, healthcare policy advisor for Jim DeMint, described the effect of the Obamacare surtax on charitable giving:

Problem is, Obamacare already DID mess with the charitable deduction – because for “high-income” individuals, charitable contributions will be taxed, beginning January 1.  Per Section 1402 of the reconciliation bill amending Obamacare, the law’s new 3.8% tax on “high-income” individuals is assessed on filers’ adjusted gross income – that’s income BEFORE deductions like those for charitable contributions are taken into account.  Individuals subject to the 3.8% tax will pay the tax on all income they receive, regardless of whether or not they donate that income to charity.  For instance, a lottery winner who wanted to donate half of his $500,000 winnings to charity would pay $9,500 ($250,000 times 3.8%) for the “privilege” of doing so.

What’s worse, this tax will hit more and more individuals over time – because the “high-income” thresholds are not indexed for inflation.  The Medicare actuary has predicted that the tax will hit only 3 percent of filers when it goes into effect next year, but nearly 80 percent of filers in the long term.

So rather than encouraging charitable contributions, Obamacare actively works to discourage them – perhaps because liberals can’t stand the thought of entities other than government engaging in service for the public good.  It’s enough to put a “Bah, humbug!” into anyone’s holiday spirit.

The fact that Republicans are refusing to challenge Obama on the Obamacare taxes, coupled by their duplicitous attempt to obfuscate their own tax hike plan, will serve as the destruction of the party.