Dramatic Tax Increases and Government Program Spending Cuts Become Law on January 1, 2013
Liberals want tax increases on the wealthiest Americans to help balance the budget, while conservatives make a case for deep cuts in programs for the poor and a widening of the tax base to raise revenues without raising tax rates.Why the fiscal cliff is like getting a huge paycheck cut
National Constitution Center - As rival lawmakers struggle to avoid the dreaded fiscal cliff in Washington, research shows that Americans will get a huge cut in their take-home pay if Congress can’t reach a deal on tax hikes and spending cuts.
In basic terms, the fiscal cliff is a set of dramatic tax increases and government program spending cuts that would decrease the annual deficit run up by the federal government.
It was put into a debt-negotiation process by lawmakers as a “poison pill,” an alternative so politically toxic that it would force Democrats and Republicans to agree, or face an angry mob of voters.
As a rule, Americans don’t like taxes, and they don’t like dramatic tax actions. Look back at the original Tea Party in Boston as an example.
A study from the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, shows that tax hikes triggered by the cliff will “dock the pay” of 90 percent of Americans.
“Taxes would rise by more than $500 billion in 2013—an average of almost $3,500 per household—as almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000,” the group said in an October 2012 report.The telling factor in the Center’s report is that after-tax income will fall in every tax bracket, at an average of 6.2 percent.
In other words, instead of getting a 6 percent raise in 2013, you’d have your take-home pay docked 6 percent, before your employer even had a chance to give you a raise.
About 40 million Americans in the lowest fifth of the economy would see take-home income fall 3.7 percent. Taxpayers in the top fifth of the economy would see a 7.7 percent drop. Middle income tax payers would see take-home income fall by 4.4 percent.
Fiscal Cliff Changes in Take-Home Pay | |||||
Percent | Dollars | ||||
Lowest quintile | -3.7% | $ 412 | |||
Second quintile | -4.5% | $ 1,231 | |||
Middle quintile | -4.4% | $ 1,984 | |||
Fourth quintile | -5.1% | $ 3,540 | |||
Top quintile | -7.7% | $ 14,173 | |||
Average | -6.2% | $ 3,446 |
The tax changes hit Americans from all angles. The biggest hit is from the expiration of the Bush-era tax cuts, but there are also Obama-era tax cuts and credits that expire.
There will be tax penalties for married couples and for families with children. And the dreaded Alternative Minimum Tax is in the mix, which would increase taxes for 22 million people.
So income taxes would go up, payroll taxes would go up, and estate taxes and dividend taxes would go up.
And there is a new tax to pay for the Affordable Care Act.
If there is a silver lining, the federal government would bring in an extra $536 billion in 2013 to use for deficit reduction. About 54 percent of that money would come from ending the Bush-era tax cuts and from new payroll taxes.
The health-care tax would take up about 5 percent of the overall tax hikes.
To get a different look at how the tax changes would affect your family, the Tax Foundation has an online calculator that lets you put in your income and deductions and see your actual tax hike under different scenarios.
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The Foundation has its critics, which say it is a conservative-leaning group.