Economix Blog: The Tax Side of the Fiscal Cliff

Come January, if Congress fails to act, sweeping federal tax increases will hit in what is not at all affectionately nicknamed in Washington “taxmageddon.”

How big are those federal tax increases? The respected Tax Policy Center is out with a full analysis of the math, and estimates the impact at more than half a trillion dollars next year alone.

In the words of Eric Toder, one of the report’s authors, “It’s just a huge, huge number.” The paper is full of such numbers. About 9 in 10 Americans would see their tax bills go up. The average household would pay $3,500 more. The typical middle-income household would pay $2,000 more. An average household in the top 1 percent would pay $120,000 more. The average federal tax rate would climb a whopping 5 percentage points. Americans would have 6.2 percent less after-tax income.

The analysis walks through the pending tax increases. The payroll tax holiday goes away, raising taxes on America’s 160 million wage earners. New provisions from the Affordable Care Act bump up taxes on the investment income of high-income households, and the Bush tax cuts for capital gains and dividends expire. The Bush-era income tax cuts end as well, with the top rate climbing to 39.6 percent from 35 percent. Without adjustment, the alternative minimum tax affects millions more taxpayers. Tax credits enacted in the stimulus go away. The estate tax jumps. It goes on and on.

The Tax Policy Center’s analysis shows that the tax increases would be painful for everyone, rich and poor.

The very wealthy would have the biggest hit, with the top 1 percent of earners seeing their average federal tax rate climb by seven percentage points. The single biggest tax increase would be on dividend earnings, with the tax rate increasing by 20 percentage points.

But the poor would not go unscathed, either. For households in the lowest income quintile, earning less than $20,113 a year, the average federal tax rate would climb 3.7 percentage points, with taxes increasing $412 on average. That works out to about $8 a week.

“For us, it’s lunch,” said Roberton Williams, a study co-author. “For other people, it’s dinner and lunch and breakfast that day.”

Moreover, many low-income families, particularly those with children, would end up paying much more, because of changes like the halving of the child tax credit.

Of course, members of the administration and Congress are already hard at work behind closed doors, aiming to stave off some of the tax increases and spending cuts due by law — the “fiscal cliff,” as the Federal Reserve chairman, Ben S. Bernanke, calls it.

The study helpfully ranks the tax increases from those most likely to happen (the expiration of the payroll tax holiday and the new Affordable Care Act taxes) to those least likely to happen (the expiration of the Bush tax cuts for lower-income earners and of the alternative minimum tax patch).

Article source: http://economix.blogs.nytimes.com/2012/10/01/the-tax-side-of-the-fiscal-cliff/?partner=rss&emc=rss