Americans may be slammed by shocking tax hike
After nearly a decade of federal tax cuts, Americans could awaken New Year's Day with a whopper of a hangover.
Breaks covering everything from child tax credits to the death tax are set to expire that day, less than six months from now, bringing higher payments for nearly every American who pays taxes.
"We've never in history seen anything quite like this, where such a major portion of the tax code is set to expire on a single date and affect so many Americans all at once," said Scott Hodge, president of The Tax Foundation, a Washington nonprofit that tracks tax policies.
Enacted in 2001 and 2003, the cuts run out unless Congress votes to extend them. President Obama proposed extending some tax breaks, for couples earning less than $250,000 a year, but lawmakers could let them all expire.
If that happens, according to The Tax Foundation's analysis, everyone would pay more from bottom to top: Taxes for a couple with two children and a $50,000 income would more than triple to $2,825 a year, while a couple with no children earning $1 million would pay $44,000 a year more in taxes, for a total bill of $298,510.
"In that first paycheck in 2011, everyone will see a chunk missing. There will be a significant impact," said Curtis Dubay, senior tax policy analyst for The Heritage Foundation, a conservative Washington policy group.
Congress might choose to extend some benefits and let those for top earners expire, said Ryan Ellis, tax policy director of Americans for Tax Reform, a Washington tax policy nonprofit group.
But if lawmakers choose to do nothing, the changes would include:
• Across-the-board income tax increases of 3 percent to 5 percent for every bracket;
• The so-called death tax on estates would return after a one-year hiatus, at 55 percent on estates over $1 million;
• Capital gains tax would rise to 20 percent from 15 percent, and dividends tax would rise to 39.6 percent from 15 percent;
• The child tax credit would be cut in half to $500 per child.
Rob Malone, 32, of Beechview didn't expect this.
"I'm surprised," Malone said. "Obama's plan was not to raise taxes. He's said many things and done the opposite."
Lee Heckman, 51, who owns Custom Framing & Gallery on Beverly Road in Mt. Lebanon, said he's worried about tax increases for small businesses. Two-thirds of small businesses are taxed at the top rate, which would increase to 39.6 percent from 35 percent, Americans for Tax Reform said.
"We're already overwhelmingly overtaxed," Heckman said.
Many of those concerned about higher taxes worry about the government's deficit spending. The government plans to spend $1 trillion more than it brings in this year.
Tax breaks are not the problem and should be frozen in place, said Glen Meakem, managing director of Meakem Becker Venture Capital in Sewickley.
"The rate of spending today is out of control," he said. "It's unsustainable and ... it's going to bankrupt the country."
One problem is that Americans don't know how much they will have to pay -- even if the news is bad, said Allan Meltzer, a political economist at Carnegie Mellon University.
Without knowing whether they'll pay higher taxes in 2011, businesses and investors are uncertain about how to spend their money, he said.
"Someone needs to announce where we're going and how we're going to get there," Meltzer said. "People won't like to hear it, but they're better off hearing it rather than speculating."