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The Last few years, most Americans watched as their investment portfolios and 401K’s vanished before their very eyes, as if they were conjured away by some twisted magician. After watching our home values erode and the date of our retirement stretch further and further into the future, we thought we’d been beat up enough.

Then, this “turmoil” became something worse – a recession. And on its heels, there is some talk of a depression.

It certainly wasn’t easy for many Americans to celebrate during Christmas: Money is tight, unemployment is rising, homes are devalued, and the short-term outlook is not exactly positive. We all hoped that Santa was going to bring some good news and lower taxes. But it didn’t happen.

We all know what the economic turmoil means for us as consumers and employees. But what does it mean for us as tax payers? How does this recession impact our taxes? There are a few interesting things at work here.

There are stories like this grim report of California’s economy and this grimmer report of Illinois’ economy. Similar stories echo in one state after another. What is implied is that the provision of services at the local, state, and federal level is funded by your tax dollars.

I don’t know about your perspective, but in my experience, governments rarely seek out alternative funding methods and instead raise taxes, create new taxes, and/or increase pressure on their IRS tax collectors to track down those who aren’t paying. So, on the one hand, governments are struggling and need to increase revenues to pay the bills.

At the federal level, something very different is beginning to take shape. Obama is moving into office in just a couple of weeks and he is putting together a stunningly large “stimulus” package intending to improve the economy. That’s good — if you believe in that sort of fiscal irresponsibility. Of course no one wants the economy to continue as it is, and whether we agree or not on whether such stimulus packages actually work or not, we’re about to be saddled with the mother of all stimulus packages – almost a trillion dollars.

We can be sure that our taxes will be impacted, and I don’t mean they’ll be going down. (Read more about the stimulus package and other economic plans from Obama here).

A careful reading of the true economic history of the FDR era (as opposed to liberal statist propaganda which seeks to justify ever-enlarging government control and spending to create a nanny state) it is plain to see that the depression-era economy actually got worse the more government intervened with its many fixes.

There were “unintended consequences”. If the stimulus package doesn’t work, we can expect a similar federal story to the state stories I mentioned earlier. But if the stimulus package does work, we will have more people back at work. That’s a very good thing. Because we’ll need them to pay off that trillion dollars of government debt.

With the government owing a trillion dollars, Congress will likely do one of two things. They will either:

  1. Attempt to make the people who still pay taxes pay even more taxes, or
  2. They will attempt to make the non-taxpayers who don’t pay taxes start paying them.

Don’t hold your breath waiting on that second option to be enacted since that would take guts — something most politicians are in short supply of.

Maybe I’m just cynical, but those are the scenarios we may expect to see playing out this year.

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