Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Wednesday, April 21, 2010

Get Ready for More Taxes

With April 15th just behind us and all the related news about taxes, it has become quite clear that we most certainly will all be faced with bigger tax bills down the road. We learned that nearly 47% of Americans pay no income tax at all. With Congress on a continued spending spree, there’s little doubt there will be new taxes to deal with and likely fewer people paying them.

The trend of just raising taxes on the rich just won’t meet the growing spending needs. A recent article in the Wall Street Journal titled “To Fix the Deficit, Tax Man Must Knock on Many Doors” (John D. McKinnon, April 12th, 2010), discussed the results of a recent study by the non-partisan Tax Policy Center. The study, according to the article: “found that to reduce the federal budget deficit to a sustainable 3% of gross domestic product, the government would have to find an average of about a half a trillion dollars each year in new revenue (or spending cuts).”

The article went on to say, that according to the study: “To cover that amount through tax increases on the top two brackets – roughly families with more than $209,000 in taxable income – top rates would have to go from the current 33% and 35% to 72.4% and 76.8%.” Clearly that seems more than unreasonable. So what will Congress likely do?

We expect you’ve all seen articles about the likelihood of a new national sales tax, better known as a value-added tax, also known as a VAT tax. Most of the European countries, as well as Canada, have a VAT tax. A VAT tax to replace our overly complex income tax might not be a bad idea. Yet it seems more likely that we will have a VAT tax on top of our income tax.

A recent editorial (“Europe’s VAT Lessons”) on the Opinion page of the Thursday, April 15th Wall Street Journal, discussed the introductory VAT rates and current VAT rates in European countries and Canada. Introductory VAT rates averaged from 3% to 17.7%. Current VAT rates average from 5% to 25%. The United Kingdom went from 8% to 17.5%, France from 13.6% to 19.6% and Germany from 10% to 19%. (It should be noted that the only country listed in the article with a current VAT rate lower than the introductory VAT rate was Canada (from 7% to 5%)). What’s more, the top income tax rates in the United Kingdom, France and Germany are respectively 50%, 45.8% and 47.5%.

Is there any doubt that a VAT tax in the United States would increase over time? And, according to the article, “VAT proponents aren’t calling for a repeal of the 16th Amendment that allowed the income tax – and, in fact, they also want income tax rates to rise.”

So get ready for more taxes. There’s little doubt they are coming. In a future blog we’ll discuss some things you should do to help minimize the impact of taxes on your financial well being.


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