Reuters writes that the 2009 U.S. tax season promises a large increase in first-time delinquent income taxpayers. Keep in mind this is happening when many states (at least 12 confirmed) are planning on increasing sales and income taxes substantially along the increases the Obama administration is planning for this year.

“Our calls are up 280 percent,” said Richard Boggs, founder and chief executive of Los Angeles-based Nationwide Tax Relief, a firm that helps delinquent taxpayers resolve tax issues.

“We’ve seen a huge rise in what we call the rookie delinquent taxpayer,” he said. “They are incredibly scared, and they have no idea what’s going to happen to them because, God bless them, they’ve never owed before.”

“Many withdrew funds from 401k and IRA retirement savings accounts before the permitted time, unaware of the punitive taxes and penalties this would generate, said Larry Walker Jr, president of the financial and tax services firm 4-Serenity Inc in Snellville, Georgia.”

Fortunately, as the article explains, the IRS has vowed “to be available to work with” those who miss the deadline for paying their taxes a little. Just look at all the help this elderly Austin, TX resident received:

“An elderly woman in Austin, Texas, who asked not to be named, said her $3,000 debt to the IRS grew to around $60,000 in taxes and penalties over 16 years despite the fact that she paid off the initial debt within six months.”

“The 61-year-old is disabled and suffers from multiple health problems. The IRS now takes $133 each month from her Social Security disability check.”

The problems people are having paying their taxes is evidence of how ineffective increasing taxes during recession really is. Not only does it stall recovery by taking away much needed consumer spending power and “wealthy” capitol, but it is completely ineffective because people can’t (and won’t?) pay! As final evidence of how the upcoming tax increases (on the wealthy) will fair, just look at what is happening now:

“Not only are America’s wealthiest suffering the largest losses in nearly a century, but the IRS will be seizing what little resources they do have left in record time,” said Richard Boggs, founder and chief executive of Los Angeles-based Nationwide Tax Relief.

“Some of my rich clients are having big problems,” said Lance Wallach, CEO and president of Veba Plan LLC, a financial consultancy firm. “Hundreds of them do not have liquid cash to pay bills.”

The wealthy will have to free up cash (many by taking heavy losses on down market positions) to pay Uncle Sam. They will in turn have less cash available for investment into small businesses, venture capitol, or the stock market. All of this spells further trouble for our already hurting economy.

The American Enterprise Institute argues the Obama Administration’s proposed limits on the benefit for high-income households from itemized deductions such as charitable donations, mortgage interest, and state and local taxes will reduce charitable donations,  make housing more expensive and make state and local taxes more burdensome.

Beginning in 2011, high income taxpayers could get at most a $28 federal tax benefit for a $100 charitable contribution rather than the $39.60 deduction that would apply under current law.

“However, capping the deduction makes state and local taxes more burdensome, increases the cost of housing, and reduces the incentive to donate to charities. These impacts affect high-income taxpayers everywhere, but the impact is likely the greatest in Democratic-leaning states since these tend to have the highest state tax rates, the most expensive houses, and the greatest concentrations of upper-income households that make large donations to charity.

According to projections from the nonpartisan Tax Policy Center, $50 billion in charitable donations will be made by taxpayers that would be affected by the Obama proposal if it was enacted. Recent economic research finds that among higher-income taxpayers, a 1 percent increase in the after-tax cost of a charitable donation reduces contributions by about 1 percent. This means that the Obama proposal would reduce charitable donations by roughly $10 billion in 2011 and by $125 billion over ten years.  To put that in context, $10 billion is the combined annual private support to The United Way, Salvation Army, American Cancer Society, Food for the Poor, YMCA of the USA, and Feed the Children.”

We agree with the assertion that the effects of these limits to deductions will be felt more in democratic (liberal leaning) states for the reasons stated in the article.  However, it should be noted that conservatives give much more to charity than liberals.    Thus, the tax increase will hurt conservative causes and conservative givers more. In fact, one might almost believe that was the intended result…

President Obama obviously won’t change his giving as a result of his new tax since, looking at his tax returns,  it won’t affect him…