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Economy could stumble without tax-cut extension

Updated: December 7, 2012 6:09AM

Dear Mr. Berko: Back in July, you wrote that the country would fall off a financial cliff if the Bush tax cuts were not extended by Congress. You predicted that the market would crash, that consumer spending would fall and that many stocks would reduce dividends because their earnings could nose-dive. But you were not specific as to how this would affect taxpayers and wage earners like me. Do you blame the Federal Reserve or the Obama administration for this mess?

— PL, Troy, Mich.

Dear PL: The tax cuts passed by Congress in 2001 and 2003 to goose a then sleepy economy expire Jan. 1, 2013. If they were not to be extended, it would force across-the-board cuts to most government programs and push the economy over a fiscal cliff. I blame the 535 privileged members of our do-nothing Congress, who have the fix-it power but refuse to use it. And thanks to these preening peacocks — who pirouette in $3,000 suits, wear gold Rolex watches and have hair slicked back like cake frosting — the U.S. economy could stumble into another serious recession. Every taxpayer would be affected, and consumer sentiment would grow blacker than the wing feathers on a rain crow. If I were a congressman, I’d be concerned about showing my face in public. Congress has an approval rating lower than that of Mahmoud Ahmadinejad, and if I were a relative or spouse of a congressperson, I’d do my best to hide that fact or change my name. Here’s how 2013 and beyond would be burry.

The lowest income tax rate at 10 percent would go to 15 percent, a 50 percent increase! The highest rate, at 35 percent, would increase to 39.6 percent. Meanwhile, the 25 percent, the 28 percent and the 33 percent rates would rise to 28 percent, 33 percent and 36 percent, respectively. I am amused that the president of the American Federation of State, County and Municipal Employees is in a snit because the lowest tax rate increase, of 50 percent (from 10 to 15 percent), is disproportionately greater than the increases for other taxpayers. Meanwhile, capital gains rates rise from 15 to 20 percent.

One of the most damaging changes for many folks is that the tax rate on dividends, which is now 15 percent, would be the same as rates on ordinary income. Many investors would watch the taxes on their retirement income more than double, while others would see their dividend tax rate increase nearly 300 percent. The wealthy would pay a dividend tax rate of 43.4 percent. Gotta love that Congress!

The exemption on inherited estates would fall to $1 million from $5 million. For those wealthy folks too obtuse to establish a trust, the tax rate above that $1 million exemption would jump to 55 percent from 35 percent. And lastly, a large swath of Americans, those who don’t earn enough to pay any of the above taxes, would take a huge hit. The 2 percent temporary reduction on payroll taxes, which supports Medicare and Social Security, expires Jan. 1. What the government giveth it also can taketh away.

On the spending side, defense programs would be slashed by 9.4 percent, and thousands of nondefense programs — such as corporate welfare and cotton, wheat, corn, oil, railroad and land subsidies — would be slashed. Other cuts include $150 million for healthy marriage promotion, $124 million for seat belt safety, an annual $99 million incentive to raise teachers’ pay, $21 million for prisoner re-entry job searches and $7 million for motorcycle safety, to name a few. Medicare would be trimmed by 2 percent, but Medicaid, Social Security and veterans benefits would be exempt for now. Note that I wrote “exempt for now.” And the unemployment rate, not the frangible political numbers but the real numbers, might rise above 16 percent.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at

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