taxes

I am going to make a prediction as to how Obama will handle the Bush Tax cuts that are set to expire at the end of this year. These tax cuts contained considerable benefits for higher income people such as reducing the tax rate on dividend from 39.5% to 15%. They also had some nice benefits for middle class, things like increasing the child tax credit from $500 to $1,000 and moving the lowest tax rate to 10% down from 15%. My prediction is that Obama will allow the tax cuts to end and then he will come in with an Obama tax cut plan directed toward the middle class.

For those who do not follow tax law like I do, I want to go back to the time before Reagan and explain how things worked in the old days. Back then tax law was described using a water pump. The Republicans believed in priming the pump at the top and the Democrats wanted to prime at the bottom. Republicans believed that if you give tax breaks to the rich they will have more profits and use the money to expand business. The Democrats felt that if you gave tax breaks to the middle class they would have more purchasing power and demand for goods would rise and business would expand to meet the demand.

As a young man I witnessed both ways and they both worked so I did not really have strong preference either way, but when Reagan lowered taxes on the wealthy something knew happened. Businesses did not expand by building knew facilities but instead just bought up existing businesses. Someone figured out that it was more efficient to buy an existing business than to start a new one so since that time I have been for priming the pump at the bottom. This is what Obama will do and I think it is a good idea.

Just as a review understand that in the 40’s the top tax rate was 94% and President Kennedy lowered it to 75% and Reagan lowered it to 28%. Clinton raised it to 39% and Bush lowered it to 35% so if Obama allows it to go back to 39% that would not be such a big deal. Having the dividend tax rate go from 15% to 39% will be a big deal as will increasing capital gains from 15% to 20% but I believe this is the plan.