People complain about how early stores begin anticipating holidays. Christmas decorations creep onto the shelves before Thanksgiving and red Valentine's hearts appear soon after New Year's. So why would someone write about ringing in the new year in August?
It's because 2011 won't just be another change on the calendar. Major tax changes go into effect as of January 1, 2011, which will impact American families, companies, and the economy. Americans need to prepare and pay attention to the decisions Congress makes in the crucial coming months about next year's tax laws.
The nonprofit Tax Foundation has a helpful overview of just how many tax rates are set to spike when the ball drops. For example, in 2011, married couples will no longer enjoy a standard deduction that is twice that of a single filer (so the marriage penalty will be back in full force). The child tax credit will be cut in half. Income tax rates will rise across all income groups. Taxes on investment will soar, with top earners facing a 33 percent increase in their tax rate on investment income. Estate taxes—which are currently zero—will return so that assets in excess of $1 million will be taxed at 55 percent.
President Obama recognizes that allowing all these taxes to increase would be devastating to the economy and to American families. So he has cherry-picked some tax cuts that he would like to preserve. In his budget, Obama proposes maintaining the current standard deduction so that married couples aren't penalized for staying married. He also wants to preserve the current child tax credit and the lowest four tax rates. Obama also doesn't want taxes on investment to rise quite as much as under current law: he'd just boost the government's take of those with higher incomes. Estate taxes would be reinstated, though at slightly less confiscatory rates: Obama wants a $3.5 million exemption and tax rate of 45 percent.
Congress likely will take many of President Obama's suggestions and reduce the wallop from the currently scheduled tax increases. Yet families should be warned: no one will be spared from the effects of these tax increases. Those with more modest incomes may not face a larger tax bill, but they'll still pay a price as the broader economy suffers.
Higher tax rates on those in the upper income brackets will mean the wealthy have less money to spend on goods and services. That's bad news for businesses who today struggle to find consumers and to all the workers who depend on those businesses for jobs.
Higher capital gains and dividend tax rates will discourage investment, which is critical to enabling real economic growth. Businesses need investors so that they can expand, hire more workers, and invest in the research and development. Companies are already sitting on trillions of dollars that could be invested in the economy. Millions of would-be investors are also keeping their assets in cash rather than investing them in the stock market. Higher tax rates reduce the expected payouts from investments. They are another reason not to put your money into the economy, and therefore will be another reason why our economic growth will remain slow.
Yet it's not just high tax rates, but even the potential for high tax rates that adversely affects the economy. Right now, American families, investors, and companies don't know what tax rates to expect next year. The specter of higher taxes alone might be encouraging many to sock away cash so that they are prepared for having to do more with less in 2011. Just the potential for higher investment taxes is likely already discouraging investors from entering the market.
The Administration's efforts to jump-start the economy have been predicated on the idea that we need more money moving through the economy to stimulate demand. They've spent hundreds of billions of taxpayer dollars based on this idea. Yet these tax changes, and their inability to reassure Americans about what the rules of the game will be next year, will push in the opposite direction and drain the economy of capital.
In that sense, Americans are already celebrating New Year 2011 today. No, there aren't sparkling lights and champagne glasses adorning our stores, but businesses, investors, and other Americans are already thinking about what life will be like—and how much they will have to pay in taxes—after 2010. This is more than a nuisance, but another unneeded drag on our economy.