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Tax Battle Has Hardly Begun

In America, as in Greece a few years ago, the public only slowly awakens to financial realities. First to be agitated are those whose emoluments are in danger, starting with the public employee unions. But eventually the general public starts to notice alarming potential tax increases. Coming up: Obamacare surtax on high incomes, income tax increases on higher brackets, estate tax hike, payroll tax "cut" repeal, gift tax hike, alternative minimum tax, and, of course, the capital gains tax. Social Security taxes may go up as part of a reform package, along with a rise in the age of retirement. Then come the state and local tax increases.

Charitable organizations are a big part of the employment picture, yet they are slow to make their concerns known. As the year ends, they are starting to pay attention. People capable of making charitable donations are letting it be known that their foundations are unable to make anything like the investment returns of yore; hence, they expect to be cutting back. Fund raisers for hospitals, churches, colleges, soup kitchens, museums, and arts groups, among others, are noticing election consequences that probably escaped them before.

There is even talk of limiting tax deductions for charity (goodbye, big grants) or even reducing the tax exempt status of charity. Then the government can take over the Formerly Independent Sector.

Reality is reshaping the recent identity politics romance.

You would think businessmen would be more anticipatory, but some are not. In a venture capital firm I know only a couple of the principals voted for Romney. The others, still not regretting their votes of course, are just now alert to the fact that no special treatment is expected in Washington, DC for small venture capital enterprises--the start-ups that need their profits to be re-invested in order to propel them into growth. It is from such growth that new jobs are created. But if the taxman can seize the seed corn, there will be little expansion and even less capital risk-taking in the near future.

Then there are the retirees and others who derive a good part of their fixed incomes from dividends. How many of them are aware yet of the tax increase possibilities, or do they all think the increases will only affect the "rich"? Social Security is a tattered security blankey for anyone above the poverty level, let alone any older person still working (as more have decided to do). The cheap money policy of the Federal Reserve--with Obama approval--means that it costs little to borrow, but also that savers are treated as suckers. Bank deposits are nearly worthless as investments. If now the dividends one counts on from a stock portfolio are taxed at a higher rate, there is only one way for one's standard of living to go: down.
College students and twenty-somethings also are going to be hurt as risk capital dries up and new jobs are not created; but, frankly, they will be the last group to figure it out. Their professors surely won't tell them.

The media have made little effort yet to explain what a relatively low capital gains tax does for the economy. Just what a high one will do likewise hasn't emerged. The political campaign just didn't provide the right atmosphere, what with all the class warfare going on.

Warren Buffett, foe of a low capital gains tax, now is getting attention for a point he made earlier but was hardly noticed in his rollicking account of his secretary's tax burden vs. his own: he doesn't want people's income tax going up after $200,000 ($250,000 for couples), as President Obama proposed. He wants it to kick in at $500,000, or maybe even a million.

Tax policy is so boring. The great public couldn't care less.

Yet.

You can email brucechapman@discovery.org

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