As Tax Day Passes, the Tax Grope Begins

April 16 (Bloomberg) — First comes Tax Day, then comes the Tax Grope.

That is the attitude of Americans toward tax authorities. Citizens have resigned themselves to the new rates, official and public, that will apply this year to long-agreed-upon definitions of taxable income. Traditional income is fair game.

The taxpayer is alert, though, to something else: future arbitrary impingement by a tax authority in an unexpected way. Sometimes the intrusion comes from an expected party, more uncomfortable and irritating than fatal. But sometimes, the intrusion shocks either by its scale or because it comes as a total surprise.

The grope image goes back to the revolutionary pamphleteer Thomas Paine, who wrote of "the Greedy Hand of government." Back in the 1960s the business writer John Brooks sketched out the grope concept further, writing of the intruding taxing authority approaching as an unwanted suitor, with a "ghastly expression of benignity."

The most obvious recent grope has been overseas: the garnishment of bank accounts in Cyprus. The depositors simply didn't expect to pay for the euro's failings from this part of their fiscal selves. Another Cyprus-related tax grab is a levy just proposed by the German government's senior economics advisers on those who own valuable houses in countries that ask for bailouts. When, say, an Englishman bought his villa in Portugal, he probably expected to pay taxes on the vacation home, but not this extra surcharge.

Budget Portents

Portents of possible impingements on Americans are evident, too, in President Barack Obama's budget.

Into the category of mild grope falls the indexing of certain tax penalties to inflation. Americans are accustomed to some of these penalties being fixed, such as amounts for traffic tickets. Under the administration plan, the penalties will no longer be fixed: They may rise with inflation and, an added zap, may be rounded up "to the next hundred dollars."

Yes, you read that right: The government is rounding to the nearest "hundred," not the nearest "dollar."

Another historically safe zone for taxpayers has been their employer's portion of the cost of health insurance. What employers pay for their insurance hasn't traditionally been included in individuals' taxable income. Now it might be, as the Treasury lets us know in "General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals," the cheat sheet on the White House's fresh intentions published along with the White House budget.

The intended effect is to drive up citizens' total taxable income and subject more of their income to top rates. And this is a double grope, for in this case the administration also proposes applying the Buffett rule, named after Warren Buffett's suggestion that rich Americans be taxed at a rate no lower than their secretaries. The Fair Share Tax would raise rates again on income to ensure that the rate the wealthy pay on their newly broadened taxable income isn't too low.

The administration's Buffett rule also increases taxation on capital gains and dividends. The Treasury boldly states that dividends and long-term capital gains, which are taxed at a maximum rate of 23.8 percent, should be taxed at higher rates by imposing a new minimum Fair Share Tax of 30 percent on high earners. Thus does Treasury try to push dividends and capital gains, heretofore not subject to the alternative minimum tax, into an AMT-style trap.

Retirement Limits

The area most Americans consider untouchable is their retirement accounts, their IRAs and 401(k)s, which aren't subject to tax until withdrawal. Slipping money into an individual retirement account has sometimes been difficult, but most Americans assume that their treasure may germinate undisturbed. Many people maintain several such accounts, valued souvenirs of otherwise painfully remembered job changes. Thoughts of these nest eggs growing safely kept many a citizen sane through the ruction of 2009, 2010 and 2011.

This budget would crack the eggs. The Treasury explanation explicitly challenges that principle of undisturbed accrual: "The current law limitations on retirement contributions and benefits for each plan in which a taxpayer may participate do not adequately limit the extent to which a taxpayer can accumulate amounts in a tax-favored arrangement through the use of multiple plans," the Treasury writes.

Page 18 of the budget suggests that an IRA or 401(k) ample enough to provide pensions of more than $205,000 a year is too high. New penalties apply to money in the plan exceeding a "maximum permitted accumulation." This reduces whatever benefit was there from compounding. The suggested limit on such savings would be $3 million.

Still these lines should chill even citizens whose 401(k)s fall short of that amount. After all, authorities could lower the limit later, as happened with the erstwhile rich-man's levy, the alternative minimum tax.

The White House is using executive power to push again for, or even force via regulation, tax increases it has failed to win from Congress. The federal government, desperate for cash, is ready to act as European leaders have acted.

If we seek an explanation why U.S. markets reacted to a small action involving bank accounts on a Mediterranean island, the Obama budget is it. Cyprus signaled not only Europe's challenges but also a Great Grope that is commencing here.

(Amity Shlaes, a Bloomberg View columnist, is the author of "Coolidge." She is the director of the Four Percent Growth Project at the Bush Institute. The opinions expressed are her own.)

© Copyright 2013 Bloomberg

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