Consequences of taxing the rich

Economists are calling the New Year’s cliffhanger a step in the right direction. When U.S. President Obama signed the bill that avoided the so-called “fiscal cliff,” it quieted the concerns of many American taxpayers.

But it is only a first step. As TD Bank Group economists Beata Caranci and James Marple said in a report, “Stay tuned; we’re just at the 100-metre mark of this relay race.”

Likewise, CIBC economist Avery Shenfeld noted in his report: “While the U.S. is not now plunging off a fiscal cliff, it’s still going down a steep fiscal ski hill that will take a meaningful bite out of economic growth.”

Evelyn Jacks, noted author and president of the Knowledge Bureau, has her concerns about the American Taxpayer Relief Act of 2012. She sees it a precursor to tax reform both in the U.S. and Canada. In the increased tax rates — to 39.6% from 35% — for those earning more than US$400,000 annually, she sees a continuation of a global trend to tax the rich. If taxes increases become too onerous, she says, wealthy taxpayers have the resources to move.

It isn’t just higher tax rates on income. For those whose income is more than $400,000 — the people who are likely to have dividend income and benefit from capital gains — the Act increases the tax rate on dividends and capital gains to 20% from 15%. Within this income threshold, estate taxes also rise to 40% from 35% with an exemption of $5 million.

This increase in estate taxes will affect Canadians with property in the U.S., says Angela Preteau, an accountant with Frostiak & Leslie Chartered Accountants Inc. in Winnipeg who teaches the Knowledge Bureau’s Cross Border Tax Course.

“It’s an issue that’s going to cause a major shift in resources,” Jacks says, “because the rich take their tax dollars with them.” U.S. citizens, however, will always have tax ties to the U.S.     

For 98% of Americans — those earning less than $400,000 a year — the Act brought good news. The Bush-era tax rates, put in place in 2001 and 2003, were made permanent. Taxes on dividends and capital gains remain at 15%. Note the TD economists, the Alternative Minimum Tax is patched permanently to avoid raising taxes on middle-income taxpayers.

Nevertheless, most American will experience some increases. Payroll taxes will rise immediately to 6.2% from 4.2%, an average tax increase of $700 per U.S. household.

Investment guru and newsletter author Gordon Pape calls the deal between the Obama administration and Congress an “imperfect” political compromise. “We are going to see more of the same going forward," he adds, "as we deal with the debt ceiling and the next round of negotiations over deficit reduction.”

Jacks will speak on “Fifty Years of Tax Reform: What You Should Know About Future Tax Burdens on Your Wealth” at the book launch breakfast of her 49^th and 50^th books, Jacks on Tax, Your Do‐It‐Yourself Guide to Filing Taxes Online and Essential Tax Facts: Secrets and Strategies for Take‐Charge People on Jan. 15 at 7:45 AM at the Albany Club in Toronto.