Taxes Could Increase For the Middle Class

One of the most important issues in any Presidential campaign is whether or not a candidate will raise or lower taxes. The most recent campaign was no different, with both candidates promising to reduce taxes for most Americans, including the middle class. Just halfway through his first year in the White House, two unidentified White House officials are floating the idea that taxes might need to increase for the middle class, an idea that many have expected but few are excited about.

Officials including Treasury Secretary Timothy Geithner and National Economic Council Director Larry summers are carefully deflecting questions about tax hikes, but neither is willing to rule out the idea of raising taxes, especially with the massive budget deficit and an expensive Health Care overhaul in the works. In addition to the proposed health care legislation, the Obama administration is pushing Congress to find a way to extend unemployment benefits for individuals who have lost their jobs during this recession.

The massive government spending programs that are being implemented to stimulate the economy come at a price-a massive budget deficit that seems to grow larger by the day. This deficit will need to be dealt with at some point, and there are only two ways to begin filling in the giant hole in the U.S. budget. The deficit will either be reduced by cutting spending, an unlikely scenario in today’s economy, or raising taxes. This year, the Federal deficit will balloon to a record $1.8 trillion.

Compounding the potential need to raise taxes is the fact that tax revenues are dropping at the fastest rate in 77 years. Overall, tax receipts are dropping at an 18% annualized pace, the biggest decline since 1932 when the economy was still suffering through The Great Depression. Corporate income taxes are down 57%. It’s hard to expand government spending and government programs when tax revenue is falling so dramatically.

Some of the reduction in tax receipts can be explained by tax cuts for individuals and companies that were part of the Obama Stimulus package. But the bulk of the decline is due to the simple fact that Americans are making less money than they did a year ago. When personal incomes are down, so are taxes. When consumers are buying fewer goods and services, corporate taxes will fall. In addition, Very few Americans are paying capital gains taxes on investments after the performance of the stock market over the past 18 months.