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Year Ahead Could Spell Uncertainty For Taxpayers

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By Lowell L. Kalapa
(Released on 12/30/07)

But for the recent subprime credit crunch, one has to admit that we, as a nation, have come a long way insofar as the nation’s economic well-being since those dark days following 9/11. Prior to the subprime crisis, the stock market hit all time highs and production kept the nation’s workforce employed.

While some of the successful recovery can be extended to the Federal Reserve keeping a tight watch on the money supply and interest rates, a good deal of the credit has to go to the major reductions in various aspects of the federal tax system. Probably the broadest tax cut enacted by the adoption of EGTRRA was the lowering of the capital gains rate and the rate of tax on dividend income. Those two components of the 2001 federal law stimulated investors to return to the market and invest in companies that fueled the economic engine.

However, because Congress was afraid to make permanent tax reductions, many of the features of the Economic Growth and Tax Relief Reconciliation Act of 2001 were adopted on a temporary basis with many of the provisions due to expire at the end of the year 2010. Many of the presidential candidates, as well as members of the majority in Congress, are proposing to do away with many of those tax cuts and adopt tax cuts for the “middle class.” While there is nothing wrong with tax cuts for the “middle class,” those tax reductions should come in addition to the reductions made by EGTRRA.

The problem is that the presidential candidates and members of Congress don’t want to give up spending those tax dollars and instead want to remain politically popular by proposing tax cuts for the “middle class” while shifting the tax back to components of the current law that are helping to keep the economy stimulated. In other words, these politicians want to win the favor of the majority of the voting constituents while shifting the tax back onto the so-called big corporations and the filthy rich.

Well, can taking away the mortgage interest deduction be in the best interest of the “middle class?” That’s what one congressional leader wants to do, especially for homes over a certain value because only the rich can afford those three and four hundred thousand dollar homes. Will someone tell that guy what the median price home is selling for in Hawaii?

And where do these politicians think the working person’s 401(k) is invested? For babyboomers who are on the cusp of retirement in the next few years, a major shift in tax policy that imposes higher taxes on investment income, capital gains and dividend income, can kiss the sweet life of retirement goodbye. Should there be a major downturn in the market, even greater than that which has been caused by the recent credit crisis, the value of those 401(k) investments will take a nosedive along with the rest of the markets.

While many taxpayers may not have realized that in addition to having the federal tax rates indexed (as opposed to Hawaii where they are not indexed for inflation), the 2001 law also reduced rates across the board. So where the top income tax rate prior to the 2001 law stood at 38.6%, 35%, 30%, 27%, those rates now have been reduced to 35%, 33%, 28%, and 25% respectively. But come 2011, those rates will revert back to nearly the same levels as the pre-2001 levels if not higher in some cases. And who are those people in the 25% tax bracket? Those are couples making roughly between $30,000 and $75,000, hardly rich by any standard and certainly not in Hawaii.

Even at the low end, the bottom bracket is taxed at 10%. That bottom bracket will disappear in 2011 and the bottom tax rates will be taxed at 15%. Even the so-called marriage penalty relief will disappear in 2011. With the politically ambitious talking about raising taxes on the rich, they seem to forget that much of the 2001 law that they chastise brought about a lot of benefits for taxpayers at all income levels. More importantly, the tax reductions stimulated the economy.

As taxpayers we should all be leery of the promises these politicians at the national level are making. It is very apparent that they have no clue about how tax reductions actually stimulate the economy and they are about to gamble with the economic outlook by promising to raise taxes on the “rich” when in the long run, those tax increases will affect the very “middle class” that they purport to champion. Care should be exercised when you hear another promise of tax cuts for the “middle class.”

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