Big Tax Increase Looms

A big tax increase is likely during the next administration, with self-employed people in many areas facing marginal tax rates of “60% or higher” as a result. That’s likely to be a boon to tax lawyers and accountants, who have expertise in helping heavily-taxed individuals find tax shelters. It should also fuel increased demand for tax-exempt municipal bonds among people in higher tax brackets.

Of course, tax increases aren’t the only way marginal taxes can go up. When the government takes away a benefit or tax-break available to the general public because a taxpayer works too hard or earns too much, that can also increase that taxpayer’s marginal tax rates. That was the effect of the rebates contained in the so-called “stimulus” plan, which gave many people who did little work a rebate, while denying any rebate to people whose nominal incomes were too high. The people denied rebates included some middle-class taxpayers in high-cost areas whose living standards were quite average by national standards, but whose income matched their higher living costs. The selective denial of those “stimulus” rebates also resulted in some self-employed people having marginal tax rates (combined federal and state) of over 60%.