t this moment, if you earn more than $250,000 a year (which isn’t what it used to be, given the steady erosion of inflation over the last 30 years), you will pay federal income taxes of about 35%, no estate taxes, and a 15% capital gains tax should the money you put at risk in the market return a profit.
As soon as next year — if the government moves up the expiration of the Bush tax cuts, as I very much expect them to — the top tax bracket will go to 39%. On top of that, the current healthcare legislation will add a 5.4% surcharge. Then, add in the Democrats’ proposed 5% war tax. So straight up we’re talking 49%.
Then there’s a near doubling of capital gains taxes, from 15% to as high as 28%. And, of course, the return of the estate tax.
But that’s just for starters, because everywhere you look states and municipalities are raising taxes and fees, and attorney generals, taking a page out of Caligula’s playbook, are casting about for their next deep-pocketed victim.
At the end of the day, the top tax rate in the U.S., starting as early as next year, will soar way over 50% of income. While further number crunching is required, it is a very safe assumption that top income earners will soon be paying over 65% of their income in taxes.
Which is to say, if you are in a top tax bracket, every penny you earn between January 1 and August 25 will go straight into the coffers of one layer of government or another. And this while more than 40% of Americans pay no income taxes at all.
This is just another symptom of the single biggest problem now facing the U.S. (and for that matter, the world): the ballooning size and cost of government. And there are no speed bumps in sight. Big government just keep growing BIGGER and BIGGER.
Even so, endless complaining won’t really do anything other than raise the blood pressure. So, what can we actually do about it? Some ideas:
1. Buy gold. Unless and until there is an angry upwelling of popular discontent at the growing size of government — and it has to be far more substantive than just a few vocal talk radio jocks, or even 100,000 or so people peacefully gathering on the Mall in Washington DC — the government will continue to grow, or even just keep running at current levels, which means the destruction of the dollar. Many tangible assets will do well, but their intrinsic value as money means gold (and silver) will do best.
2. Be smart about taxes. Keep an eye on Pelosi’s tax trap — if you have appreciated assets that qualify for long-term capital gains, consider selling them before year-end to lock in the lower capital gains tax. Likewise, if you run a business and you can pull any income into this year, versus next, consider doing so.
3. Consider a Roth IRA in 2010 – There will be another opportunity coming next year to convert existing IRA’s into a Roth IRA. By all means consider doing it. You will pay tax on the full amount of your IRA’s but all future tax will be waived, including future gains on the IRA corpus. If you believe taxes are going up like I do, I’d rather pay next year’s tax rate than what it might soon be in the future. You will also be able to spread out your tax due over several years. You will want to discuss this with your tax consultant.
Look after yourself — no one else is going to do it for you. This is what real money looks like: