Posted on 12/03/2010 10:25:03 AM PST by Corky Boyd
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
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What a surprise.
What a surprise.
>>Why the $250,000 tax threshold is so dangerous … It’s not indexed for inflation<<
And in that is why the AMT is such a thorn. It was implemented when, if you made $50,000, you were “rich”.
I will tell you exactly how limits like these affect employment.
It is widely acknowledged that small business creates most of the jobs in our economy. A lot of small business start as an idea that others are willing to fund and this has given rise to what are called “angel” investors. The most important of these are angels who are willing to invest in ideas that have not grown into a functioning product let alone a company.
The rule of thumb for a savvy angel is that if he does his due diligence and finds 10 deals that are worth investing in, that despite all the attention that everyone will give to each of these startups, 3 or 4 will just blow up and leave the angel with a total loss, 3 or 4 will be “zombies”, or companies that function but never go on to achieve growth, and one or two will be home runs and achieve a “successful exit”, or “liquidity event”. These latter events are some successful sellout where the original investors make a lot of money.
The angle must get the home runs in order to replenish his capital pool in order to make the pool grow even though most of his deals do not pay off big. The angle must also be patient, for it takes between 3 and 7 years for his investment to pay off.
And when he gets his payoff, he will have a lot of income in that year. He will be “rich”, and he will have to pay state and federal taxes in the highest tax bracket. He can only replenish his capital pool with after-tax income. The rest of the years he is not rich. In fact, he may have a capital gains loss to carry forward.
And this my friends is why these tax rates are so damaging to the economy. When you kill the ability of the angel investor to get a (after tax) return on his investment that compensates him for the risk he took, the energy he devoted to the effort and the length of time he put his own money at risk, you kill the formation of startup companies of the kind that are most likely to produce a large number of high paying jobs.
Obama policies will produce plenty of inflation.
Make everyone a “millionaire” and tax them to death
When it’s for their benefit, they don’t index for inflation. The AMT, the tax brackets, the $600 threshold for 1099’s and this.
But they do index their OWN salaries, pensions and benefits for inflation.
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