Bush Looks at a Tax Hike on the MIddle Class

Bush, 20 days past his election to a second term, is already looking for ways to help the rich and screw the middle and lower classes (Link to story). One of the proposals being floated is eliminating all tax on investments. Touted as a way to spur the economy, this will actually be a tax break for the rich and a shit of the tax burden to the lower and middle class tax payers.

How his plan works? The tax on investment income would be eliminated. This would be a tax break for me and the small percentage of other Americans that have a stock portfolio that pays dividends or own stocks that appreciate in value. This would not affect the millions of Americans that have been saving for retirement by using a 401K or other retirement account because there is currently no tax on these accounts. So, I would pay no tax on the dividends I get from Microsoft, etc. But, I get no benefit for the stocks I hold in my 401K.

Does not seem so bad, right? Well, here is where the middle and lower class get screwed. In order to pay for the tax cuts for the wealthy, the government would raise taxes on the middle and lower class.

First, the state and local tax deduction you take on federal taxes would be eliminated. Currently, if you pay taxes on the state or local level, you can deduct this amount from the taxes you pay to the federal government, thus reducing your tax burden. Under Bush's plan, this would be tossed. This means that the millions of Americans who do not receive substantial stock dividends would be getting a tax hike while the few Americans who receive much of their income in stock dividends would be getting a tax cut. Unless you make more off of your stocks than you pay in state and local taxes, your taxes go up, not down. Essentially, if you work for a coproration that issues stock and pays a dividen, your hard work ends up putting more money in the pocket of a person who has done nothing more than have enough money to buy stock in your company. They didn't put in the hours, they didn't deal with the daily hassel, but they get the tax cut while you get the tax hike.

Second, the deduction business (large and small) are able to take for paying a portion of your health care insurance would be eliminated. This means that most employees would be forced to burden the entire cost of their health insurance instead of sharing it with your employer. This would cost working families thousands of dollars more in out of pocket cost each year. The hard working Americans who already struggle to pay health care costs would be the hardest hit.

Third, by eliminating the tax on investments, the incentive to buy municipal bonds is gone. Municipal bonds, which are tax free, are a way for local governments to raise money to pay for your local projects, such as building new and better sewage plants, school systems, roads, etc. Municipal bonds pay less interest to investors than traditional corporate bonds, but are attractive to high income investors because the income is non-taxable. Without this tax break incentive, local municipalities would have to either forego issuing new bonds or would have to raise the interest payments on the bonds to compete with the higher returns corporate bonds pay. In the end, municipalities would have to raise your taxes or use more taxpayer money to pay the increase interest to bond holders. Either way, there is less money for local projects. Municipal bonds are an essential tool for your local community to provide you with the services you need.

So, by far, the vast majority of Americans would be getting a tax hike while only a few would be getting a tax cut.