And if you are a family making more than $250,000 a year, some of your itemized deductions will vanish and you will pay more taxes on income, capital gains and stock dividends.
The possibility of such tax increases exists because virtually all the tax cuts approved by Congress in 2001 and 2003 and signed into law by former President George W. Bush expire at the end of this year.
“Basically, we go back to the world as it was in 2000,’’ said Roberton Williams of the Tax Policy Center in Washington.
Most economists and political analysts don’t think that will happen. They predict Congress will extend some, if not all, of the 2001 and 2003 tax rates.
“If I were in Las Vegas, I would probably say the smart money would be on tax cuts extended for most people except for high-income people,’’ said Gerald Prante, an economist with the Tax Foundation, a conservative organization in Washington.
The battle on Capitol Hill this year over whether to extend the tax cuts should be another divisive exchange between Republicans and Democrats. But unlike many struggles which end up in a stalemate, this time neither party wants gridlock because no action will mean tax increases across the board.
President Barack Obama wants Congress to extend the lower tax rates for individuals earning less than $200,000 a year and families making less than $250,000 annually.
But under his plan, those individuals making more than $200,000 a year and families above $250,000 would pay higher taxes on income, capital gains and dividends.
By contrast, congressional Republicans are pressing to extend all the tax cuts for everyone. They insist it is folly to raise anyone’s taxes as the economy struggles to recover from last year’s crippling recession. They contend that taking money from anybody will hinder private investment, which will slow economic growth.
Making the debate even more complicated are deficit projections by the nonpartisan Congressional Budget Office.
The CBO predicts that if Congress approves Obama’s budget — including keeping the lower tax rates for families under $250,000 — the federal treasury will lose a staggering $2.2 trillion in the next 10 years.
The result is a series of difficult choices for policy makers and lawmakers. Democrats warn that if all the tax cuts are extended, the deficit will get worse because it could lead to higher interest rates. Republicans say that raising taxes on the wealthy will damage the economy.
“If there were a painless way, then we would have been out of this long ago,’’ said Joel Slemrod, a professor of economics at the University of Michigan.
Slemrod argues that Obama’s approach of raising taxes only on the wealthy is probably the safest bet. While acknowledging that the economy will remain shaky next year, Slemrod said “not raising any taxes in the face of this fiscal imbalance also has economic effects.’’
“We start to play out a scenario where interest rates go up,’’ Slemrod said. “So it’s not as if increasing taxes has certain adverse impacts, but not raising taxes do not.’’
But other economic professors, such as Marc Poitras at the University of Dayton, argue that raising any taxes now can choke off the recovery.
“There is no economic model out there of whatever flavor — Keynesian or otherwise — that says that a tax increase is stimulative,’’ Poitras said. “In the long run, they have to do something about the deficit because the deficits they are running are totally unsustainable. The problem with the budget is more of spending (problem) than taxing. It will not be solved until they bring spending under control.’’
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