Fort Apopka

  • March 23, 1775 is the day Patrick Henry gave his famous "Give me liberty or give me death" speech. Listen to the speech and how it pertains to the health care bill that was ironically signed on the same day 230 years later.
  • Patrick Henry Audio

Starting January 1, 2011 a number of the tax cuts that were put in place in 2001 and 2003 are set to expire for individuals making more than 200K a year and families making more than 250K. While the vast majority of people will correctly say that this will have no effect on their taxes let me ask a common sense question.

How many of you are employed by a poor person?

Many small businesses fall into this category and will see their taxes go up. Are they going to hire more or less people if their taxes increase?

When wealthy people are hit with higher tax rates they find creative ways to show less income. The end result is less economic growth and less tax money collected by the IRS. Facts be damned, this is about fairness after all. The rich need to pay "their fair share". Despite the fact that the upper 10% of earners pay the vast majority of taxes already we need to impose more fairness even if it hurts everyone.

This is the essence of the progressive mindset. Progressively punish those who succeed and reward those who fail.

Here are the details of the tax hikes:

  • State sales tax deduction will be eliminated (all income levels)
  • 10% bracket back to 15% (up to 68K)
  • 25% bracket back to 28% (up to 137K)
  • 28% bracket to 31%
  • Dividends 15% to 39.6%, ouch
  • Capital Gains 15% to 20%

Let's not forget that the new health care bill has a number of new taxes that take effect in 2011.

  • Impose 10% tax on indoor UV Tanning (already in effect)
  • No longer allowed to use FSA, HSA, HRA, Archer MSA distributions for over the counter medications
  • Wealthier seniors ($85k/$170k) begin paying higher Part D premiums
  • Impose new annual tax on brand name pharmaceutical companies
  • Employers required to report value of health benefits on W2
  • Penalties for non qualified HSA and Archer MSA distributions double (to 20%)

Numerous other taxes and penalties take effect in 2012, 2013 and 2014 due to the health care takeover.

  • New tax on all private health insurance policies to pay for comp. eff. research
  • Impose $2,500 annual cap on FSA contributions
  • Increase Medicare wage tax by 0.9% and impose a new 3.8% tax on unearned , non active business income for those earning over $200k/$250k (not indexed to inflation)
  • Generally increases (7.5% to 10%) threshold at which medical expenses, as a % of income, can be deductible
  • Eliminate deduction for Part D retiree drug subsidy employers receive
  • Impose 2.3% excise tax on medical devices
  • Individuals without govt approved coverage are subject to a tax of the greater of $695 or 2.5% of income
  • Employers who fail to offer "affordable" coverage would pay a $3,000 penalty for every employee that receives a subsidy through the Exchange
  • Employers who do not offer insurance must pay a tax penalty of $2,000 for every full time employee
  • Impose "Cadillac tax on high cost plans, 40% tax on the benefit value above a certain threshold: ($10,200 individual coverage, $27,500 family or self only union multi employer coverage) takes effect 2018

To add insult to injury the administration is also floating around the idea of a VAT tax. A VAT (Value Added Tax) is a tax on a product at each stage of production and distribution. A tax is applied when the product moves from the manufacturer to the wholesaler and then again from the wholesaler to the retailer. This will make everything we buy more expensive as companies will have no choice but to pass the cost of these taxes on to the consumer. Just the threat of this creates enough uncertainty to keep businesses from growing

Here's what we can expect as a result of this impending tax hike. Businesses tend to look 24-36 months out when estimating their costs and taxes are one of their primary concerns. Knowing that taxes will go up next year and then again in 2012 they can reduce costs by shifting profits to tax year 2010 and shifting costs out to 2011. The effect of this natural business policy is that we will see the economy pick up in terms of quarterly earnings,dividends and capital gains. This will result in somewhat better than expected GDP growth and tax revenues. The deficit for 2010 may come in slightly lower than the 1.6 trillion the CBO forecasted.

On the flip side of the coin FY 2011 will see the economy give up all the gains and momentum as companies report lower profits and dividends. The increased tax rates will not result in more tax revenue because no matter what the rate is if the value is zero you collect nothing. Companies will hold back showing profits and paying dividends as much as possible in the hope that some of the tax hikes will be repealed by a new congress in 2011 for FY 2012.

If you have money in the stock market please do not get greedy and assume the recent run up will just continue. The better than expected earnings over the next six months will be hailed as a sign of a long term recovery and people will begin jumping back into the market only to see it fall off rapidly when 2011 rolls around.

This is a somewhat unique event as most past tax increases have not been telegraphed that way this one has been. Companies have been warned long in advance that these tax hikes would take effect in 2011 as Obama has promised since the campaign trail to not renew the Bush tax cuts when they expire. Companies have had time to position themselves to take advantage of our current tax rates so to pay as little as possible at the higher rates of 2011.

What we will not see is any significant drop in unemployment as companies are not going to hire people now only to have to let them go in eight months. This will be the epitamy of the jobless recovery, and the recovery will be very short lived.

From The Gods of the Copybook Headings by Rudyard Kipling
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return.