The taxman cometh… through thy back door (Updated)

“Tax the rich” has been a familiar talking point for the Democrats, and President Obama and Congressional Dems have been repeating it like a mantra recently. But while the Democrats are pounding on the front door of the middle class railing on about how the wealthy don’t pay “their fair share” of taxes, look who’s sneaking in the back door to loot and plunder:

The Obama administration’s plan to cut more than $1 trillion from the deficit over the next decade relies heavily on so-called backdoor tax increases that will result in a bigger tax bill for middle-class families.

In the 2010 budget tabled by President Barack Obama on Monday, the White House wants to let billions of dollars in tax breaks expire by the end of the year — effectively a tax hike by stealth.

While the administration is focusing its proposal on eliminating tax breaks for individuals who earn $250,000 a year or more, middle-class families will face a slew of these backdoor increases.

The Bush tax cuts of 2001 reduced individual tax rates, cut taxes on capital gains and dividends, and incrementally dialed back the estate tax until 2010, when it went to zero.

But if the Bush cuts, which were part of the Economic Growth and Tax Relief Reconciliation Act of 2001, are allowed to expire at the end of this year as the Democrats intend, the highest tax bracket rate will increase to 39.6 percent from 35 percent. But the dirty little secret is that middle-income families will also take hits: the 25 percent tax tier will return to 28 percent; the 28 percent bracket balloons to 31 percent; and the 33 percent tier will increase to 36 percent. That special 10 percent bracket will go the way of the dinosaur — it will be extinct.

The federal government will reach out and touch investors, who will be tapped for more taxes on their earnings next year also, with the rate on dividends skyrocketing from 15 percent to 39.6 percent (yikes!) and the tax on capital-gains rising to 20 percent from 15 percent. The estate tax will rise zombie-like from the grave in 2011 after the Bush tax cuts expire, but some Democrats want to reinstate the death tax sooner, if they can get away with it.

Millions of middle-class households already may be facing higher taxes in 2010 because Congress has failed to extend tax breaks that expired on January 1, most notably a “patch” that limited the impact of the alternative minimum tax. The AMT, initially designed to prevent the very rich from avoiding income taxes, was never indexed for inflation. Now the tax is affecting millions of middle-income households, but lawmakers have been reluctant to repeal it because it has become a key source of revenue.

Without annual legislation to renew the patch this year, the AMT could affect an estimated 25 million taxpayers with incomes as low as $33,750 (or $45,000 for joint filers). Even if the patch is extended to last year’s levels, the tax will hit American families that can hardly be considered wealthy — the AMT exemption for 2009 was $46,700 for singles and $70,950 for married couples filing jointly.

Now if all that wasn’t bad enough, Big Government’s lust for middle-class money will also result in fewer tax breaks to everyday Americans this year if other provisions of the Bush cuts are allowed to go quietly into the night. Taxpayers who itemize will discover that the option to deduct state sales-tax payments instead of state and local income taxes is gone. The $250 teacher tax credit for classroom supplies will be nowhere to be found, and the deduction for up to $4,000 of college tuition and expenses will be just a fond memory. Also, individuals who don’t itemize will no longer be able to increase their standard deduction by up to $1,000 for paying their property taxes. Even the unemployed get the shaft, as the first $2,400 of unemployment benefits, which were tax-free in 2009, will be subject to taxes.

Democrats and tax hikes — they’re joined at the hip, if not the backside. As always, don’t listen to what the Dems say. Watch what they do.

Update: Big Brother didn’t like the Reuters story, so he got his media lapdog to yank it. Details at Big Journalism.

- JP

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