$1.6 Trillion Tax Increase Is No Laughing Matter

$1.6 Trillion Tax Increase is no laughing matter.  Word is today that Treasury Secretary Tim Geithner met with Kentucky Senator Mitch McConnell today to discuss the “Fiscal Cliff” and the expiring tax cuts.  According to Senator McConnell, he said that the Treasury Secretary offered nothing  in ideas for spending cuts except for tax increases.

The tax increases are being targeted on the rich making more than $200,000 (single) or $250,000 (married filing jointly) which includes expiring tax cuts, limiting deductions, increasing the capital gains, interest, and dividends tax.  In addition, the Treasury Secretary discussed extending the automatic spending cuts for a year.  

Senator McConnell said that during the meeting, he broke out in laughter since the Treasury Secretary was only offering tax increases without limiting spending increases.  Treasury Secretary Geithner proposed that the tax increases would bring in $1.6 Trillion over ten years.  Some experts have said that increasing the taxes on the rich would not come close to bringing in the amount of money that the Obama is proposing that it would bring in.  So where would the other money come from.  Already, public companies are moving their dividends dates from the first quarter of 2013 to December 2012 to avoid having shareholders pay higher taxes on dividends beginning in 2013.   

In Europe where they have raised taxes on the rich, the rich have simply moved their residence to a lower tax countries.  In Great Britain, it has been reported that two-thirds of the rich have left the country after they raised taxes on the rich.  Even in Cuba, they are introducing a tax system for the first time since Fidel Castro came to power.

In the past as governments increased tax rates or introduced new taxes, people changed their buying habits to avoid paying taxes.  The luxury boat industry back in the 1990s in one example where the government introduced a new tax on luxury boats targeting the rich.  What happened next in an example of government doesn’t understand basic economics.  The luxury boat collapsed and nearly disappeared after the tax was introduced.  People just quit buying or switch to alternatives when faced with a choice of higher prices or taxes.

Another example is gas prices.  As gas prices increased to $4.00 or $5.00 (depending on the City and State, people quit spending on non-necessity items, brought fuel-efficient cars, and pulled back on driving causing the gasoline supplies to increase and lowering the price.

Will investors pull back from the stock market in order to preserve their cash and lower their taxes rates?  Will investors hold on to the stock to keep from paying capital gains?   Will the “Fiscal Cliff” cause a disruption that sends a shock wave through the economy?  Will the Government finally step to face the deficits, out-of-control spending.  Only time will tell.  One thing is for sure, the decisions they make in Washington affects everyone when it comes to the tax increases and the Fiscal Cliff. However,  $1.6 Trillion in taxes increases is no laughing matter. 

I saw a great quote this week from Warren Buffet that indicated that “Congress should raise taxes on the rich to make the middle and lower class feel better that Congress was making the rich pay for being wealthy and successful.” Please feel free to leave a comment below.

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