The U.S. Congress is considering yet another increase in the so-called "kiddie tax" unearned income for those 24 and younger, money typically placed in their accounts by wealthy parents in order to skirt capital-gains taxes.
Though it may fit today's needs, writes Amity Shlaes, it may discourage the next generation of investors and entrepreneurs.
"Parking money with kids to get a better rate is a time-honored American tradition," Schlaes writes.
The tax increased last year so that full-time college or graduate students who made more than $1,800 in investment income had to pay tax at their parents’ tax rate.
Under the incoming Obama administration, a higher tax rate may be applied to all investment income, not just income above $1,800.
"The motivation of the tax writers is obvious," Schlaes noted. "Since tax rates will doubtless rise in coming years, such parking would only become more attractive."
Capitol Hill staffers reckon that the kiddie tax could haul in $2 billion over 10 years, she added. The tax applies to income from dividends, investments, and capital gains.
Though some may argue that this tax impacts only a small number of Americans, Schlaes said that is beside the point.
"Infant rentiers are not the only young people at issue here. There are also entrepreneurs pursuing higher education, reasonably enough. Some may turn into the next Bill Gates, Michael Steinhardt, Bruce Kovner or Warren Buffett," Shlaes writes.
"These young people are better equipped than just about anyone in society to take big risks for big rewards."
Shlaes worries that would-be entrepreneurs may wind up taking salaried jobs rather than struggle with a small, start-up business financed by their parents. This could devastate the prospect for job growth in the U.S. in the future.
Tax increases in some form on future earners may be nearly impossible to avoid. The Congressional Budget office now sees a $1.2 trillion deficit for the 2009 budget and a $703 billion deficit for 2010.
On Wednesday, President-elect Barack Obama warned of "red ink for as far as the eye can see" if the economy isn’t put back on track quickly.
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