Looking into the Crystal Ball

Back in 1971, a British band called Ten Years After scored their biggest hit with their idealistic anthem, "I'd Love to Change The World." While that song is arguably a reaction against the radical protests of its time, it includes a line that on its face appears written to give today's tea-partiers heartburn:

"Tax the rich, feed the poor,
Till there are no rich no more."

Today in Washington, politicians are buzzing with talk about how spiraling deficits may choke our economy. House Budget Committee Chair Paul Ryan has offered a proposal to cut $4 trillion in spending by privatizing Medicare and turning Medicaid into a block grant program. President Obama has countered with his own $4 trillion proposal to match deep spending cuts with tax increases.

While no one is seriously proposing to tax the rich until "there are no rich no more," the lyric begs an interesting question. Just how much would we have to "tax the rich" to claw our way out of this budget mess?

The answer, it turns out, may be more than they can afford to pay. A recent study by the Washington-based Heritage Foundation found that if Obama wants to keep his promise not to raise taxes on families making under $250,000, the top tax rate - currently 35% - would have to rise to 142% . You don't have to be a math major to know that's just not possible. Even the accounting geniuses who ran Enron would be hard-pressed to make those numbers work!

A similar study by the Washington-based Tax Foundation reports that for 2008, the top 1% of taxpayers (those earning $380,354 or more) reported $1.685 trillion in adjusted gross income and paid taxes of $392 billion. If we raised taxes on those earners to 100%, the extra $1.3 trillion in revenue would nearly close this year's deficit. But how long would that work? How much income would you bother making if it all went to taxes? "Till there are no rich no more," indeed!

The lesson here is that we can't just count on "the rich" to bail the rest of the country out. We probably can't even count on income taxes to do the job all by themselves. If lawmakers want to tax their way even partially out of this hole, they're going to have to target the middle class. Why? Well, for the same reason Jesse James robbed banks - because that's where the money is!

We talk a lot in these emails about the importance of planning . Some clients mistakenly believe they don't make enough to have to worry about planning their taxes. The sad reality is that as politicians accepts the inevitability of tax increases, tax planning will become more important, for every one. So don't wait until it's too late! We're here with the help you need - and we're here for your friends, family, and colleagues too.