If it’s not too late for 2013 predictions (what can I say, I’ve been busy!), here are my five prognostications for the year’s major tax developments:
1. Tax Reform. Republicans will partner with Democrats under the dubious banner of “pro-growth tax reform” to enact stealth tax hikes on high wage earners through limiting their deductions. Look for a cap limiting the tax benefit of deductions to 28% of total deductions.
2. Social Security. During the fiscal cliff soap opera the Obama administration refused to engage in discussions about Social Security, claiming it is not yet a driver of deficits and thus should be discussed separately. This is about a clear a sign as you could ask for that the administration intends to ask for tax hikes to offset any spending cuts. In today’s environment it means these negotiations will yield broad bi-partisan agreement that high earners need to be hammered but good, today through tax hikes and tomorrow through means testing. Look for a donut-hole style increase in the taxable wage base (Social Security taxes, also known as the OASDI portion of FICA, currently apply only to the first $113,700 of wages), kicking in at $300,000.
3. Corporate Taxes. We won’t go to a territorial system yet, but a one-time reduced rate on repatriated earnings will pass. The highest corporate rate will be reduced to 28%, with various credits and deductions eliminated to offset the rate reduction. Not to worry though. Congress will immediately begin selling new deductions and credits to its corporate donors to take the place of the old ones. GE will still pay no corporate income tax.
4. Municipal Bond Interest. This is the one tax break that truly benefits billionaires. Interest paid on public-purpose municipal bonds is exempt from income tax, the alternative minimum tax and Obamacare taxes. Enough people have taken notice that I suspect a minimum tax in the 10% range may be part of tax reform. I say “may” only because this is one loophole where the interests of the truly wealthy and blue-state spendaholics align.
5. Carbon Tax. Still not happening.