The President is moving aggressively to combat our economic crisis, and as promised, this will have some impact on our taxes. Basically as President Obama warned, the middle-class will pay less, and the rich will pay more. The plan includes approximately one trillion in tax increases over the next decade on earners that make over $250k a year. To put it into perspective, a couple with children and a joint income of $500k a year would see a tax increase of about $11,300 per year if all the provisions are passed. A few specifics –
• The top two tax rates increase from 33% to 36% – and from 35% to 39.6% starting in 2011.
• There will be additional limitations of deductions and exemptions.
• Tax rates on capital gains and dividends will increase.
It is especially interesting to note that in the midst of our real estate crisis, there is a move to lower the value of deductions on home interest. Households that currently pay in the highest tax rates of 33% and 35% would only be allowed to deduct interest at the 28% rate. On the surface this would seem counter to our goal of getting the real estate market moving again, but Obama’s experts point out that it is primarily the well-off that benefit from this deduction (households with an income of $200k or more account for 30% of all mortgage deductions), so in all likelihood this would not negatively impact real estate sales.
This is a tricky dance for the President. On one hand he needs to raise taxes, but in such a way that he doesn’t eliminate incentives that keep business Warriors moving the economy forward. But if there was ever a time in history when a President had the political capital to pull this off – I think it is now. I was in San Francisco last night having dinner with a very wealthy friend, and we both agreed that we would happily see our taxes increase to get the economy moving. A few thousand dollars a year in taxes seems like a good investment if it can solidify the economy, and help the stock market gain ground on the massive losses.