So let’s go the post-game analysis of what just transpired between our Congress and the President over the past few months. As a result of the “fiscal cliff” that a few days ago we either went over, passed by, or took a wrong turn away from at Albuquerque, we were presumably worried about the following: 1) An increase in income tax rates, including the highest marginal rate from 35% to 39.6%, which is essentially a return to the Clinton-era tax rates; 2) Return of the Alternative Minimum Tax threshold to Clinton-era level; 3) A new set of taxes resulting from the Patient Protection and Affordable Care Act, also known as “Obamacare”; 4) Spending cuts of about $100 billion in a gargantuan budget of $3.76 trillion; 5) Expiration of measures delaying the Medicare Sustainable Growth Rate from going into effect. (This is the so-called “doctor fix”, without which doctors will presumably be under-reimbursed for their services, leading to a shortage of primary care physicians.) 6) Increase in the percentage of the employee portion of the payroll tax from 4.2% to 6.2%. So basically we were told to blame the Republicans for the imposition of taxes (both old and new) which originated primarily from Democrats…. Based on what I observe in the media and in much of liberal-blog land, it is a mystery why much of them decry the return of 1990’s income tax rates. We’ve been told by a number of spokesmen throughout the past three years that the Clinton tax rates were so beneficial, and created so much prosperity, and thus we should return to them. Of course, taxation is merely one aspect of “the Clinton years”. If we really wanted to return to them, we’d have to replicate the spending and regulation level as well! Easier said than done! If we were to return to an inflation-adjusted level of the Clinton-era spending, the federal budget would have to be cut by $500 billion dollars immediately. Not over 5 years, or over 10 years, but immediately! And not based on next year’s projected spending, but from the amount spent this year! We’d also have to reduce regulations tremendously and stop printing money for god’s sake… But the media and the economic illiterati are only interested in raising marginal tax rates on the highest earners. They’re not interested in touching the middle class rates. And wisely so! Returning middleclass tax rates to their pre-2001 rates would mean: 1) President Obama presides over a substantial middle class income tax hike and 2) the public would have to acknowledge that George Bush cut taxes for middle class earners, and not just the wealthy! The payroll tax increase is an interesting aspect of this. Historically, it was gradually and incrementally increased between its inception in 1939 and 2008 from 2% to 12.5%. That includes both employer and employee portions. The salary cap, or the amount on which the payroll tax is assessed, has also steadily increased over the years. Some have argued that the cap be removed, but doing this changes the nature of the social security program from a “contribution-based” system to a form of welfare. For instance, an individual earning $1,000,000 in a given year and who is self employed, would pay around

$150,000 in Medicare and Social Security payroll taxes. The expectation of getting a decent return on this “contribution” in the future is unrealistic, without the government cutting some enormous checks. The bottom line is that our federal Treasury may not see more revenue in the coming year. What many in power repeatedly fail to understand (or pretend to) is that higher tax rates are not a guarantee of more revenue. Entrepreneurs and investors change their behavior when faced with higher rates. When rates were enormously high in the 1950’s and 60’s, businesspeople and investors used the numerous deductions and shelters available to them to keep their burden low. Some of those remain today – a prime example is tax-free municipal bonds. Whether you’re Kenny from South Park or Bill Gates – you don’t pay a DIME in earnings on them. Middle class workers are less able to significantly lower their tax burden via deductibles. Furthermore, the payroll tax is unavoidable and rarely able to be reduced for a given salary income. An increase in the payroll tax is thus guaranteed to bring in more revenue, given that the number of workers in the economy stays steady. So, in the end, I think the President got what he wanted –higher rates on the rich. It won’t help. Right now, we can raise the rate to 100% on income over $250,000 and still only have enough to run the government for 8 months. Yet, the irony is that his more reliable hope for revenue will be the restoration of the higher payroll tax rate. None of this will be worth a hill of beans thrown off a cliff if the real problem is not addressed – the level of federal spending. And as it turns out, it wasn’t. Anthony V

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