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Tax Increases on the Horizon

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Democrats in Congress haven’t made any moves to extend the Bush tax cuts of 2006, so workers of all income levels can expect to see a 5% increase in their income taxes, and additional tax increases from a number of other areas.

The taxes affected include the capital gains tax, the alternative minimum tax, education deductions, and sales tax exemptions. They also include small tax increases, like a rollback in tax breaks for tuition expenses and donations of books to public schools.

"If you believe the current consensus, we could potentially see the top income tax rate hiked back up to 39.6%, an attempt to reinstate the death tax at something like 45%, and the end of the lower 15% rate on capital gains and dividends,” said Andrew Moylan, director of government affairs at the National Taxpayers Union. “That's on top of a string of other tax hike proposals pushed by Democrats, like a cap-and-trade national energy tax or a financial transactions tax."

It’s unlikely that Democrats will stop the tax cuts from expiring, but if they do, they won’t make a move until after the November elections. That allows them to punt on the issue when votes are at stake – maintaining their veil of fiscal responsibility while keeping up record levels of spending.

Some Democrats are keeping up a better effort than others to maintain that veil by cooking up ways for lower-income earners to be exempt from the tax increases scheduled to take affect. Like many other Democratic policy proposals right now, no clear plan is on the table. If Democrats fail to make exemptions for lower income earners, the taxes will hit middle-class Americans the hardest. For example, about two-thirds of taxpayers who make between $50,000 and $100,000 will be on the hook for the AMT tax.

The AMT is just one way an expiration of the Bush tax cuts would bring in a new $4 trillion over the next 10 years. That would provide a ready source of funding for President Obama’s ever-extending federal programs, but also taking a significant chunk out of the national debt. That’s one reason Democrats are giving to as a reason behind their push to let these tax cuts expire; they believe that it’s hypocritical to want to lower taxes if one is legitimately concerned about higher deficits. Donald Marron at the Brookings Institution explains.

“It’s hard to imagine that spending restraint alone can solve America’s long-run fiscal woes. Facing an aging population and rising health care costs, the federal government will continue to expand even if policymakers take serious steps to trim spending,” wrote Marron in an analysis this week. “Cutting back on loopholes and other tax expenditures, taxing carbon emissions, introducing a value-added tax – all of these deserve attention in case America decides that it wants to finance a substantially larger federal government.”

But Republicans question why Democrats would effectively increase taxes when the economy is in the pits and millions of Americans are out of work. The answer is simply because they believe that higher taxes don’t curb growth. That’s the root of the problem, says Moylan.

“We could eliminate our deficit and create a surplus tomorrow by enacting a $2 trillion tax hike immediately, but that wouldn't be responsible and it sure wouldn't be smart,” he said. “Seeing as the federal budget has doubled in little more than a decade, it's clear that Washington has a spending problem, not a revenue problem."

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