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By Staff | Jan 20, 2013

Here are changes to the U.S. tax law enacted in the fiscal cliff package:

  • Top rate on [taxable] income – 2012: 35 percent income threshold of $388,350 (joint/single filers) ; 2013: 39.6 percent income threshold: $450,000 (joint) and $400,000 (single).
  • Top rate long-term capital gains and dividends – 2012: 15 percent on $70,700 (joint) and $35,350 (single); 2013: 20 percent $450,000 (joint) and $200,000 (single).
  • Net investment income tax (Obamacare): 2012 – None; 2013: 3.8 percent $250,000 (joint)/$200,000 (single).
  • Personal exemption phaseout and Pease limit on itemized deductions – 2012: None; 2013: $300,000 (joint) and $250,000 (single).
  • Social Security tax, employee share – 2012: 4.2 percent on earnings up to $110,100; 2013: 6.2 percent on earnings up to $113,700.
  • Medicare tax surcharge – 2012 None; 2013: 0.9 percent on earnings above $250,000 (joint) and $200,000 (single).
  • Top rate on estates – 2012: 35 percent, or $5.12 million; 2013: 40 percent or at least 5.12 million (indexed for inflation).

The 2 percent payroll tax hike hits the most people. It is not as much a tax hike, as it was a return from a tax holiday. They can rob from contributions to Social Security and Medicare for only so long before they create bigger fiscal problems than they are trying to solve.

One of the most important facets of this package is that these changes are permanent. They don’t sun-set at some date in the future. They set tax law and it will require another act of Congress to change it. Business and taxpayers will know what the rules are.

Mitt Romney will have a huge tax increase as he was paying the old 15 percent capital gains rate and he will now pay the new 20 percent capital gains rate plus the 3.8 percent Obamacare investment income surtax, adding up to 23.8 percent.

The 41 percent ordinary income tax applies to income to couples above $450,000. It will impact 1 percent of Americans. There are many ways including limits on deductions that taxes went up even on those making less than $250,000 – the President’s middle class income threshold. Taxes on the middle class went up, just not their income tax rate.

I was pleased with the compromise on the death tax. It was frankly, a bit of a surprise. Leaving the exemption at $10 million per couple, keeping the stepped up basis, with the only change being a small increase in the tax rate from 35 percent to 40 percent was a big victory for agriculture.

We dodged a bullet. This could have gone in other far worse directions. They were never going to eliminate the death tax and if they did, losing the stepped up basis was too big a penalty to pay. The government would have collected more in capital gains tax revenue from ag estates than from inheritance taxes under those rules.

Under recent estate tax law, the rules changed yearly, complicating estate tax planning. The rules have now been set so estate planners will know what they are. It will take another act of Congress to change which makes it unlikely.

Republicans have staked out the position that the tax side of the deficit reduction equation is over. They are done. The Democrats say, “Hold on,” there are a trillion dollars of deductions and corporate loopholes that need consideration for elimination. I am afraid that I agree with the Democrats. Here is why.

The $6 billion in subsidies baked into the tax structure for Big Oil should be eliminated. The oil industry said that the government shouldn’t be picking winners or losers, but unlike the ethanol blender’s credit, which required constant reauthorization and was let to expire, oil subsidies have been around so long they were built into the code. That protected them from the scrutiny that ethanol subsidies succumbed to. Big Oil doesn’t need the government help saving $60 billion over the next decade.

I also think that we ought to charge them a surcharge of several dollars a barrel on every barrel of oil they import to cover the huge military cost of protecting the 8.4 million barrels of oil net equivalent imported each day. That is over 3 billion barrels a year. A $10 barrel surcharge for security wouldn’t cover the total actual cost to the military funded by U.S. tax payers, but it would raise $30 billion in revenue annually or $300 billion over a decade to offset some of the military cost.

The U.S. taxpayer subsidizes the world oil sector though the billions spent each year keeping carrier battle groups in the Persian Gulf. I think China benefits more from that than from any currency manipulation. We now borrow the money from them to protect their oil for them.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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