Conservatives Fear Tax Increases
First, I want to say that the Republican Congress did pass a tax increase last year. The Tax Increase Prevention and Reconciliation Act of 2005 did prevent various tax increases from occurring this year, and defers others due to apply in future years. It was estimated to save taxpayers $69 billion. BUT..... it passed a $2.1 billion tax increase on Americans living overseas.
When it was signed into law this year on May 17, the changes are applied retroactively back to Jan 1, 2006.
Here is some background. The United States is the only nation that taxes its citizens and residents on their overseas income. Such overseas residents can use the foreign earned income exclusion clause if they are (i) a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or (ii) a U.S. citizen or resident present in a foreign country or countries for at least 330 full days in any 12 consecutive month period. Before the Act, the maximum exclusion amount was to have been $80,000 for 2006 and 2007, and indexed for inflation after 2007. The amount of the housing cost exclusion was equal to the excess of a taxpayer's housing expenses over a base housing cost amount. A qualified individual also may elect to exclude certain foreign housing costs paid or incurred on his behalf (or claim a deduction where the costs are not paid by the employer).
Under the new Act, the $80,000 maximum foreign earned income exclusion amount is adjusted for inflation after 2005. As a result, the maximum 2006 exclusion is $82,400. That was the good news.
The bad news is that housing costs are limited to 30% of the maximum foreign earned income exclusion (computed on a daily basis) for the calendar year in which the tax year begins, multiplied by the number of days of bona fide residence or presence for which the qualified individual is eligible for the exclusion.
Thus, U.S. citizens are residents are adversely affected if they are living in Bermuda, Hong Kong, the Middle East, and Singapore. Those that are living in high taxed European countries would have a less impact because of the foreign tax credit, but they would still see a tax increase.
Since I lived in London from Jan to June 2006, I have to see if I need to pay more to Uncle Sam. Thank you Republicans for giving me a tax increase!
NY Times - Tax Leads Americans Abroad to Renounce U.S.
Intl Herald Tribune - U.S. executives warn expatriate tax increase may backfire
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Back to the main topic at hand. Washingtion Times is reporting that Republicans are worried that the Democrats will raise taxes on upper-income citizens and President Bush may agree to it.
Of course, Republicans are somewhat mum (except for the happy fiscal conservatives) since Democrats are reining in earmarks from the 2007 congressional spending bills. Since the GOP failed to pass nine of the 11 fiscal year 2007 appropriations bills, the Democrats have to do it. One proposal is to pass a huge omnibus bill that would cover the rest of the departments. The one good thing is that the Democrats will remove all earmarks from the spending bills, and introduce a more stronger earmark transparency requirement for the following year, something that the Republicans failed to do.
The concern is that Bush may agree to some tax increase on upper-income families to win accomodations from Democrats. In addition, Bush has not rule out raising payroll taxes to help shore up our Social Security system. Since November, Mr. Bush has said everything should be on the table in the effort to fix the program's finances -- a statement in sharp contrast to his declaration after the 2004 elections that "We will not raise payroll taxes to solve this problem."
A bit of background. The Federal Insurance Contributions Act (FICA) imposes a withholding Social Security tax equal to 6.20% of the gross wage amount, up to but not exceeding the Social Security Wage Base ($90,000 for the year 2005; $94,200 for 2006; and $97,500 for 2007). The same 6.20% tax is imposed on employers. For each calendar year for which the worker is assessed the FICA contribution, the SSA credits those wages as that year's covered wages. The income cutoff is adjusted yearly for inflation and other factors.
A separate payroll tax of 1.45% of an employee's income paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding an effective rate of 2.9%, funds the Medicare program. This program is primarily responsible for providing health benefits to retirees.
The combined tax rate of these two federal programs is 15.3%.
One sad thing I should add is that when President Bush or anyone in Congress stated that the federal deficit is not doing too bad, they failed to mention that under the rules of unified budgeting, the surplus from the Social Security Trust Fund is used to offset the total fiscal debt, making it look much smaller. So when the Trust Fund starts turning out deficits, expect a more than larger sized federal deficit each year.
Ok, so it is possible that Congress may introduce a bill to raise payroll taxes or eliminate the wage base cap currently in place. Should we be happy about this? Even such a tax increase would only extend Social Security's viability by a couple of years. For workers such as ourselves, we will likely see a bankrupt retirement system when we retire. While we have our 401k or any other profit-sharing program, could we continue to ignore the fact that 6.2 percent of our wages are going to a system which will not benefit us when we reach retirement age?
As for tax increase on upper-income, more information is needed. Are we talking about going back to the same tax rates before 2001? Or an even higher increase? While some of you may think that a person earning over $100,000 is doing pretty good, a person living in New York City on that salary is actually barely getting by. Over a majority of Americans are living paycheck-to-paycheck and even some upper-income families are in that situation too.
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