This recession has hit the U.S. very hard causing anunprecedented level of government intervention. Trillions ofdollars have been committed in spending, bailouts, tax credits andguarantees. Eventually we must pay for these financialcommitments and we pay for them in the form of higherlong-term interest rates, increased taxes or, most likely, acombination of both.Not only is the federal government runningmassive and record-setting deficits but most states are in thesame position. While the fed is presently committed tokeeping interest rates low (we know they will have no choice but totighten monetary policy at some point), the tax picture is anotherstory. There is no doubt that taxes are going to increase andincrease across the board. Federal, State and local taxes aregoing to increase and everyone, even those who were promised no taxincreases constantly in pre-election speech after speech afterspeech.The Bush administration's tax cuts sunset at the end of 2010which will push the federal capital gains rate up from 15% to 20%.It is expected that the present administration will raise this ratealso by only three to five percent. They can get away withwhat looks like a small increase because they are not responsiblefor the 5% increase already built into the system. So we could belooking at a 23% to 25% capital gains rate beginning in 2011. Butwait, there is more....The healthcare proposals that are going tobe debated in congress have politicians scrambling to find ways topay for the (at least) $1 trillion program. In order to achievetheir objective of making this program appear deficit neutral, weare seeing some of the most creative accounting techniques used,most of which increase taxes and on, just about, everyone. Some ofthese techniques would even make Bernard Madoff blush. (Forinstance, under the healthcare proposal, we are theoreticallydeficit neutral because we count revenue over 10 years but spendingover only 6. Revenue comes in beginning in 2010 but payments arenot made until 2014. I wish we could account for profits this wayin the private sector. ) But let's get back to taxes.For the firsttime in over 30 years, we may see the return of income tax bracketcreep. Buried deep in the 2,000 page healthcare bill is aprovision which will partially repeal tax indexing for inflation.What this provision means is that, as earnings rise over alifetime, Americans can look forward to paying higher income taxrates even if their income gains are not "real". Two main featuresof the current version of the plan are not indexed. The first isthe $500,000 threshold for the 5.4% income tax surcharge (does theword "surcharge" really sound more benign than "tax"?). The secondis the payroll level at which small businesses must pay a new 8%tax penalty for not offering employees health insurance.Let's takea look at the true impact of the surcharge. This tax is set tobegin in 2011 on all income above $500,000 for single filers andabove $1 million for those filing jointly. Assuming a 4%inflation rate over the next decade (not an aggressive assumptiongiven our fiscal picture), the $500,000 threshold for an individualfiler would impact families with the 5.4% surcharge at aninflation-adjusted equivalent of about $335,000. After 20 yearswithout indexing, the surcharge threshold falls to about$250,000. As the real inflation rate rises, these thresholdsdrop further.This mechanism is a covert way forpoliticians to dig deeper into more worker's pockets each yearwithout having to legislate tax increases. The negatives of failingto index compound over time, producing a windfall for thegovernment as the years go by hitting unsuspectingtaxpayers.This trick is nothing new and its impact is tangible. Forexample, in 1960, just 3% of tax filers paid a 30% or highermarginal tax rate. By 1980, the inflation of the 1970's resulted inthat share increasing to 33% of filers! These stealth taxincreases, which forced more Americans to pay higher tax rates onphantom gains in income, were widely thought to be unfair. Inresponse, in 1981, as part of the Reagan tax cuts, indexing the taxbrackets for inflation was adopted by a bipartisancoalition.Another example of the impact of this stealth,inflation-ruse, technique can be seen in the performance ofthe Alternative Minimum Tax. In 1969, when this tax was firstpassed, it was intended to only hit 1% of all Americans. In 1993,the Clinton administration increased the AMT tax rate. At neitherof these times was the tax indexed for inflation. As a result, thenumber of families hit by this tax more than tripled over the nextdecade. Today, unless congress passes an annual "patch", familieswith incomes as low as $75,000 can be affected.Importantly for ourreal estate industry, the 5.4% surcharge has been creativelywritten to be applicable to modified adjusted grossincome. This means it applies to capitalgains taxes. Piled on top of the increase caused by thesunsetting of the Bush cuts, our 2011 federal capital gainstax rate would balloon to 25.4%, even without any additionalincreases imposed by the present administration. If congress actsas expected, the new rate could top 30%.With such a dramaticincrease in the capital gains rate, sellers, who are consideringthe sale of commercial real estate in the short-term, mustseriously consider the implications of this increased cost. Logicwould dictate that this dynamic should catalyze an increase insales activity in 2010 as seller's rush to take advantage of thelow 15% rate. This increase in sales volume would be welcomedas 2009 will be, by a wide margin, the year with the lowestturnover (in terms of number of buildings sold) of investmentproperty sales since at least 1984 (we do not have records prior to1984).The creative accounting in Washington could have anothersilver lining for our industry. Similar to the way the "modifiedadjusted gross income" includes capital gains, it also includesdividends. Adding the 5.4% surcharge to the increase caused bythe Bush cuts sunsetting, the tax rate on dividends will explodefrom 15% to 45% ( 5.4% plus the pre-Bush rate of 39.6%). Thisdramatic increase would shift massive amounts of capital away fromequities into other forms of investments, including commercial realestate.I always try to figure out how our industry is affected bywhat goes on in Washington. While there may be some positives forcommercial real estate, the present shenanigans are troubling. Thereturn of the days without inflation indexing is nothing more thanstealth taxation. It would repeal a 30 year bipartisan consensusthat it is unfair to tax unreal gains in income. The result will bethat millions of middle-class Americans will be hit with new taxesover time with taxes advertised as only hitting "the rich".Mr.Knakal is the Chairman of Massey Knakal Realty Services in NewYork City and has brokered the sale of over 1,000 properties in hiscareer.

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