A potentially fatal flaw in President-elect Obama’s tax plan is its implicit assumption that the dwindling group of citizens left paying income taxes won’t change their ways – except for allowing more of their earnings to be copped by the government for redistribution.
Vice President-elect Biden has declared that such socio-economic passivity would be patriotic. Cynical observers characterize the behavior more clinically as “bending over”.
While my observed sample is admittedly small and may not be representative of a broader population, I’m seeing the early stages of a full blown tax payers’ revolt. Now that the ballots have been counted, some of the folks left holding the tax bag are hatching plans to vote again – this time with their pocketbooks, Many are dusting off pre-Reagan tax planning playbooks to defer or avoid as much of Obama’s added tax burden as they legally can.
How they’re doing it
For example, many people are doing the obvious: taking capital gains now at the current 15% rate and reinvesting in “like grade and quality” securities that they plan to hold until the capital gains rate comes back down (as it eventually will – it always does).
Other folks are moving money to tax-free bonds and tax deferred annuities – accepting lower apparent returns just to avoid higher taxes.
More daring investors are redeploying capital out of the U.S. – opening off-shore accounts and buying real estate in foreign locales.
A few of the most aggressive folks are seriously pursuing citizenship in more tax-friendly nations. One friend-of-a-friend has already moved to Mexico and changed her family’s citizenship.
Then, there’s “income management”. Those who are close to the $250,000 threshold are managing their incomes to slip under the tax-exploding trigger. Why work 60 hours per week for the same after tax income as working, say, 40 hours?
Some corporate execs are reportedly lobbying compensation committees to get annual bonuses accelerated into the 2008 tax year. Tax-deductible expenses (e.g. December’s mortgage payment, charitable gifts) are being delayed until after the first of the year – when they’ll provide a bigger tax advantage.
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Why they’re doing it
Why all these shenanigans ? For some tax payers, it’s simple economics; for others, it’s personal.
Many folks in the much maligned top 5% — and many in the next lower layers who suspect that they’ll be the next targets – are feeling a bit disenfranchised at the moment. They tip their hats to Obama for compiling a formidable voting block of constituents who ride free with no income tax liability or get paid to ride – receiving refundable credit checks from the government. And, they know that when Obama’s tax plan goes into effect, the free riders will constitute a voting majority.
Some narrow-minded tax payers just don’t see the inherent fairness of wealth redistribution that Obama and Biden see. Many “top-fivers” are ready and willing to pay a little more in taxes for schools, roads, and tanks, but bristle at the notion of having their hard earned money redistributed to folks that Barack Obama considers more deserving. They say: that’s not the American way. In fact, some consider it to be bordering on taxation without representation – a traditional American no-no.
All of this presents the President-elect with a mega-challenge: he has promised many additional high cost government programs, but his plan reduces the number of folks paying taxes, the slow economy is cutting incomes (hence, there’s less to tax), and if my observations are right, the surviving group of tax payers is working feverishly to pay as little in taxes as the law allows.
So, one might ask: where is the soon-to-be President Obama going to get the money he needs to fund his ambitious programs?
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(to be continued tomorrow)
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