Friday, December 3, 2010

Why the $250,000 tax threshold is so dangerous … It’s not indexed for inflation

Prior to 1981’s Kemp Roth Tax Act, which indexed tax brackets for inflation for the first time, Democrats were happy to watch inflation force taxpayers into higher and higher tax brackets. Bracket creep was the easy way to raise tax rates without putting themselves on record.

The experience of the Carter years, with inflation (CPI) rates rising to over 13.5% made indexing a high priority for the incoming Reagan administration. And indexing has worked well. But there are reminders of disastrous consequences of unindexed tax legislation, most notably the Alternative Minimum Tax. The AMT was intended to rectify the problem where several hundred millionaires were able to avoid all Federal income taxes through legal deductions. Now it ensnares millions and, because of its complexity, is becoming known as the tax accountants’ welfare act.

Lest you think Obama’s $250,000 threshold could not affect you, think again. During the Carter years, inflation rates rose from 6.50% in 1977 to 13.58% in his last year in office, 1980. It took Fed Chairman Paul Volker over three years, 20% interest rates and a recession to get inflation under control. It was bitter medicine, but necessary to stabilize the dollar. Yet the Fed now is throwing the 2-3% inflation rate limits to the winds with QE2, preferring to inflate our way out of the recession.

Nothing could be worse. Should Carter’s 13.5% inflation become the norm, $100,000 today will become the equivalent of $250,000 in about 7 years. A tax on the rich, as Obama describes it, will have the same result as the AMT, reaching deep into the middle class.

But this is the intent of Democrats. They are happy with inflation. They want stealth tax increases.

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