NCPA - National Center for Policy Analysis

THE COMING TAX TSUNAMI

October 29, 2007

Over the next 25 years American taxpayers -- particularly baby boomers -- will face a fiscal tsunami, say Pamela Villarreal, a policy analyst and D. Sean Shurtleff, a student fellow with the National Center for Policy Analysis. 

At the forefront of the problem are the Alternative Minimum Tax (AMT) and Medicare:

  • In 2007, 19 million new taxpayers earning less than $100,000 will be subject to the AMT, and each will pay on average nearly $3,000 more in taxes on income earned. 
  • Medicare Part A expenditures alone are expected to grow 85 percent to $385 billion and the projected annual shortfall will grow to nearly $45 billion in 2016. 
  • Filling the projected shortfall in all parts of Medicare will require an income tax increase of 22.7 percent by 2030.

Allowing the Bush tax cuts to expire will only worsen the problem:

  • In 2009, the tax bracket for the lowest income-earners will rise from 10 percent to 15 percent; the highest earners will face an increase from 35 percent to more than 39 percent.
  • In 2011, the capital gains tax rate will increase from 15 percent to 20 percent for most taxpayers, and will increase from 5 percent to 10 percent for taxpayers in the 10 percent and 15 percent federal tax brackets.
  • The tax rate for dividends will rise from 15 percent for most taxpayers to normal income tax rates, which can exceed 39 percent.

To help rectify the problem, Congress should:

  • Make the Bush tax cuts permanent -- particularly the income, dividends and capital gains tax rates.
  • Continue to raise the ceiling on retirement account contributions, and retain the higher "catch up" contribution allowed for 50-year old and older workers.
  • Allow workers to contribute after-tax earnings to an account to "prepay" retirement health care expenditures; a similar account for Social Security would be beneficial as well.

Source: Pamela Villarreal and D. Sean Shurtleff, "The Coming Tax Tsunami," Brief Analysis No. 600, National Center for Policy Analysis, October 29, 2007.

For text:

http://www.ncpa.org/pub/ba600/

 

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