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Huge tax increase looms at year-end ‘fiscal cliff’
WASHINGTON — A typical middle-income family making $40,000 to $64,000 a year could see its taxes go up by $2,000 next year if lawmakers fail to renew a lengthy roster of tax cuts set to expire at the end of the year, according to a new report Monday
Taxpayers across the income spectrum would be hit with large tax hikes, the Tax Policy Center said in its study, with households in the top 1 percent income range seeing an average tax increase of more than $120,000, while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range.
Taxpayers across the income spectrum will get slammed with increases totaling more than $500 billion — a more than 20 percent increase — with nine out of 10 households being affected by the expiration of tax cuts enacted under both President Obama and his predecessor, George W. Bush.
The expiring provisions include Bush-era cuts on wage and investment income and cuts for married couples and families with children, among others. Also expiring is a 2 percentage point temporary payroll tax cut championed by Mr. Obama.
The looming expiration of the large roster of tax cuts is one of the issues confronting voters in November, with the chief difference between Obama and GOP candidate Mitt Romney being the tax treatment of wealthier earners. Mr. Obama is calling for permitting rates on individual income exceeding $200,000 and family incoming over $250,000 to go back to Clinton-era rates of as much as 39.6 percent.
Both candidates call for rewriting the tax code next year, but any such effort promises to be difficult and could take considerable time.
Monday's study, by the independent Tax Policy Center, deals with the immediate increases set to slap taxpayers in January under the existing framework of the tax code.
Few are talking of renewing Mr. Obama's payroll tax cut, even though that would mean a healthy tax increase for many working people. Working families with modest incomes would be hit hard as the child tax credit would shrink from a maximum of $1,000 per child to $500.
As a result, a married couple earning $50,000 with three dependent children that currently receives an almost $1,500 income tax refund largely due to the child tax credit would see their fortunes reversed by more than $3,000 next year and pay more than $1,500 in income taxes while seeing their payroll taxes go up by $1,000 if the full menu of tax cuts expire.
"It's just a huge, huge number," said Eric Toder, one of the authors of the study.
Economists warn that the looming tax hikes, combined with $109 billion in automatic spending cuts scheduled to take effect in January, could throw the fragile economy back into recession if Washington doesn't act. The automatic spending cuts are coming due because of the failure of last year's deficit "supercommittee" to strike a bargain. The combination of the sharp tax hikes and spending cuts has been dubbed a "fiscal cliff."
"The fiscal cliff threatens an unprecedented tax increase at year end," says the report. "Taxes would rise by more than $500 billion in 2013 — an average of almost $3,500 per household — as almost every tax cuts enacted since 2001 would expire."
Cumulatively, the country would see a 5 percentage point jump in its average tax rate, which works out to taxes on the top 1 percent jumping by more than 7 percentage points and about 4 percentage points for most people earning below $100,000 a year.
Put another way, people in the $40,000-$64,000 income range would see their average federal tax rate jump from 14 percent to 17.8 percent — or an increase in their overall federal bill of 27 percent.
All told, almost 90 percent of all households would face a tax increase, though the top 20 percent of earners would bear 60 percent of the overall cost. Across all households the tax increases would average almost $3,500.
The expiration of cuts on capital gains and stock dividends is a key reason why wealthier people would see a higher increase in their tax burdens.
Republicans controlling the House have also called for the expiration of Obama-backed tax cuts for the working poor, including expansions of the earned income and child tax credits.
But all sides are calling for the renewal of Bush-era tax rates for everyone else. Without a renewal of those rates, a married couple would pay a 28 percent rate on taxable income exceeding $72,300 instead of the 25 percent rate they now pay. And the 10 percent rate paid on the first $8,900 of income would jump to 15 percent.
The new top rate of 39.6 percent would kick in for income over $397,000. The current top rate is 35 percent rate.
The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution.
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