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Biggest Middle Class Tax Increase in History Will Come in Five Months
There is one aspect of the final debt deal from DC that took me by surprise. I was convinced the 2% reduction in payroll taxes would be extended through 2012. On July 12th I wrote about this and got it completely wrong. Not only did I think there would be a one year extension of the existing holiday; I forecast that the subsidy would actually be increased. I was steered in the wrong direction by the Boss himself. On July 11th Obama stated:
I want to be crystal clear. Nobody has talked about increasing taxes now. Nobody has talked about increasing taxes next year. We’re talking 2013 and the out years.
In the same press conference he added:
(cuts in FICA payroll taxes) would be a component of this overall package.
I don’t think the President said these words without having some sort of understanding with Speaker Boehner. Two weeks ago an economic stimulus was part of the plan. Today there is nothing. I think I understand what may have happened. When push came to shove the FICA holiday got shelved. That had to happen to get a deal done. Why? Because we are so broke we can’t afford the stimulus.
The deal that was reached to get the debt ceiling raised results in a 2012 reduction in expenses of only $21b. This comes to 1/8th of a percent of GDP. Meaningless. But if the tax holiday had been rolled for another year it would have resulted in $120b of additional 2012 expenses (net -$100b). This amount (plus the interest on it) would have wrecked the economics of the overall plan. So what was originally hailed as a good idea (by both sides) was shot down in the end.
I think this is an important development. It points to two things. The first is that we are economically vulnerable and we have no traditional responses. The second is that we are going to hit a very big economic wall on January 1, 2012.
As of the first of the year taxes on payrolls are going up by 2% across the board. This will suck $10b a month out of consumer’s pockets. I think it will prove to be a critical $10b.
The reason that the current stimulus was directed at FICA taxes is that this was the most progressive way to provide some relief. Those same individuals/families (average income of $37,000) will be hurt the hardest when the rates go back up. For a family with two average incomes the tax increase comes to $1,500 a year.
Will that make a difference? You bet it will. Toward the end of the month many families will get squeezed. (Good luck with your Wal-Mart stock when that starts to happen.)
The $120b in increased taxes will translate to a direct reduction of consumer spending. As a result, GDP will take a hit. The move to FICA taxes will, by itself, reduce GDP by 1/2 to 3/4%. That is a very big deal. One would have to be blind not to recognize that the economy is currently approaching stall speed. And now we have introduced another big headwind. That wind will be blowing in our face in less than five months.
The debt limit crisis has forced the political leaders in DC to throw out the Keynesian playbook. In the end this might be a good thing. But it is going to hurt like hell this winter. Sometime around February we are going to hit a very cold and solid wall. The economy could tank.
Possibly some readers can answer these questions:
Did Obama completely crater on this?
Absolutely! Not only did he fold on his base (middle class) he put a landmine in the economy for 2012. Exactly the worst thing for a guy to do when running for office.
Did Boehner also get outmaneuvered?
I think he was forced to fold on the FICA stimulus. I’m convinced he wanted to extend the tax holiday. A bad economy is bad for Republicans too.
Is our government functioning properly?
Absolutely not! We may have just made the same (similar) mistakes that were made in 1937. I think all of Washington has folded on their responsibilities.
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tank in this context = severe down turn in fortune.
One example metaphor is the carnival game where a person is suspended over a tank of water. customers can pay for a chance to drop them into the assumed cold water for the humorous/humiliation. "Dunking tank"
Also in rural places "going into the tank" is often cleaning out a well or cistern or even septic tank. (sewer) a terrible job to perform, selection to do said work would be considered very bad fortune.
And yes, the jail cell for arrested drunkards is called the "drunk tank"
so tank = bad place in this context.
Barter!
According to the IRS, bartered good/services ARE taxable. Have a nice day...
Resist! Practice civil disobedience every day.
Restrictions On FED Money Creation
......And yet there is NO restriction on the FED's ability to issue money to their friends, or on guarantee's, or below market rate loans, or loans that may be forgiven when no one is looking.
I didn't see anything addressing the FED's commitment of U.S. Taxpayers to the additional $ 12 TRILLION that occurred after the $700 Billion ran out in 2008.
If anyone tries to repeal the Bush Tax Cut on the rich, it's called a Tax Increase. However when it happens with the payroll tax, somehow it's not a Tax Increase, WTF?
So, we're back to normal.
The Middle class is Obama's base? They're Kulaks in Obama's eyes.
Not precisely: in the eyes of his globalist Jew masters - Soros and Co. - they certainly are. Which is why Soros and globalists push for "gun control". They can't do a Ukraine on the white middle class UNTIL they disarm it.
I can't fault anyone these days for failing to foresee that reality could force a politician to cave. For the last 3 years they have seemed totally immune to the concept.
More insurrection @ http://carolelieffthecuriouscapitalist.c
March, 2006.
Bet he wishes no one found this one ...
“The fact that we are here today to debate raising America ’s debt limit is a sign of leadership failure. It is a sign that our government can’t pay its own bills...that we depend on ongoing financial assistance from foreign countries to pay for our government’s reckless...policies. Leadership means ‘the buck stops here.’ Instead our Congressmen and Senators shift an overwhelming burden of their bad choices onto the backs of our innocent children and grandchildren. Americans deserve better. I will oppose all efforts to increase America's debt limit.”
-Sen. Barack Obama, D-Ill.
Speech on the Senate floor about his decision to vote against raising the debt ceiling during the Bush Administration.
That was before he got his marching orders from the banksters.
You're missing another key aspect of this: The rise in self-employment taxes on small business owners.
All I've heard lately is the focus on "helping small businesses and entrepreneurs" and yet they just added $2,000 to their tax burden. Congrats on failing to make any real change and still sticking it to the middle class.
understandable that you got it wrong. these guys lie constantly.
"On July 12th I wrote about this and got it completely wrong."
I enjoy reading authors who have the decency to admit when they're wrong. Those who can't admit fault can never learn from the past.
Good stuff here Bruce. Not looking forward to January/February headwinds though...
-FN
Well said Newbie and Bruce
Wait 'till the Bush tax cuts expire.
Whammy!
I feel sorry for all the butlers, nannies, governesses, and gardners who are going to be laid off.
All those rich bastards in the 10% tax bracket will be paying 15% when the Bush tax cuts expire. No more private jets for them. HAHAHA
Only idiot bastard liberals that don't know the difference between 15%, 10%, interest income, dividends, capital gains and earned income think that "rich bastards" only have a 10% tax bracket.