The 2012 U.S. federal tax code will remain largely the same as last year, due to the extension of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” However, President Obama alluded to a significant change in the near future for some Americans, during his annual State of the Union address, on January 24th. As of now, the lowest individual income tax rate will stay at 10% throughout 2012, rather than rising back UP to 15%, and the highest income tax rate will remain at 35%, rather than increasing to 39.6%. The 15% maximum tax rate on long-term capital gains and dividends were also extended through 2012, fueling a heated debate on whether or not the highest income earners in our country should pay more taxes on their investment earnings.
If you tuned into the annual State of the Union address last week, you probably saw Warren Buffett’s secretary Debbie Bosanek (boe-SAHN-eck) sitting near the First Lady, as a special guest of President Obama. You would have also heard about the so-called “Buffet Rule,” which stems from the statement made by Buffet that his secretary pays a higher income tax rate than he does! In an editorial Buffet wrote last August for The New York Times, he admitted that he has a 17.4% effective tax rate. The “effective tax rate” is the net rate paid by a taxpayer, when adding up the total amount of taxes paid and dividing it by the total taxable income. Buffett argued that the rich should pay taxes at a higher rate, even though he himself makes a substantial part of his annual income off investment earnings taxed at the 15% rate. As a national proponent for increasing taxes on the wealthy, the “Buffett Rule” was first introduced last September by President Obama, as a means to, as he puts it, “alleviate income inequality in the U.S., between the top 1% of Americans and the remaining 99%.” In his State of the Union address, President Obama updated the “Buffet Rule,” by proposing a minimum tax rate of 30%, on those who earn at least $1 million dollars annually.
The capital gains tax rate has been a hot topic in the media recently, as presidential hopefuls release their tax returns in advance of the upcoming November election. Billionaire Warren Buffett thinks he has the answer to the debate. As we all know, he is one of the richest men in the world, but he’s not leading by example when it comes to the taxes he owes the IRS. It might seem like an easy fix to simply double the taxes on long-term capital gains for the rich, but the consequences of that one single action could derail economic growth for years to come. If you think about it – long-term capital gains are taxed at a lower rate to encourage individual investments into companies, whose growth fuels the economy. Investors have already been taxed on their investment principal, and increasing taxes on any potential earnings to 30%, could detour investors from investing at all, as the risks of investing may start to outweigh the potential rewards. What the U.S. economy really needs right now, are more people investing in our country and corporations, not less!
I would like to hear from you on this important topic of “taxes.” Do you think we’re paying too much in income and capital gains tax, or not enough? Let me know.
Until next week, Dump Debt, Invest Wisely, Believe in Yourself and Make it Happen!