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Huge tax increase looms at year-end 'fiscal cliff'

By Andrew Taylor

Associated Press

POSTED:
LAST UPDATED: 11:18 a.m. HST, Oct 01, 2012


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 today.

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.

All told, the government would reap more than $500 billion in new revenue if a full menu of tax cuts were allowed to expire. 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 President Barack Obama.

"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.

It's likely that Washington policymakers will allow the payroll tax cut first enacted for 2011 to expire, and 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.

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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DAGR81 wrote:
Its time to elect a President who can provide some positive leadership during these difficult times. This is not the time for an apprentice...and a slow learner.
on October 1,2012 | 11:22AM
Highinthesierras wrote:
So very true. Also, a Senate that has the courage to pass a budget - are you listening King of Pork? Kaka?
on October 1,2012 | 11:34AM
steveoctober wrote:
Perhaps. But the "other" candidate is a tax cheat. No thanks.
on October 1,2012 | 12:48PM
hawaiikone wrote:
Didn't see the headline about the IRS going after Romney. Please explain.
on October 1,2012 | 05:08PM
Pacej001 wrote:
Facts, please.
on October 1,2012 | 05:11PM
Kaleo744 wrote:
I think were screwed either way...which would be the less evil one.
on October 1,2012 | 03:20PM
hawaiikone wrote:
It's obvious that a combination of tax increases and reduced spending is the only realistic path to getting out of this mess. Endless finger pointing and extreme posturing only delays the inevitable resolution. We've allowed our government to spend too much money, and borrow uncontrollably, and the longer we delay the only logical solution to this mess the closer we get to foreclosure. By then it won't really matter if we've become a socialist country or not. We'll be owned by others and unable to control our own destiny.
on October 1,2012 | 05:07PM
Pacej001 wrote:
Correct. If this continues, soon we'll all be Opihi picking and subsistence fishing. Can't stand to repeat the last four years. Time for a change.
on October 1,2012 | 05:12PM
Papakolea wrote:
Very true. Good post.
on October 1,2012 | 06:38PM
Papakolea wrote:
The sunset of the tax reductions will kick-in on January 1 so no matter who is elected in November, it will be up to Obama to do something because the president (new or re-elected) doesn't get sworn in until the new year. Smart money will bet that Congress will kick the can down the road one more time and simply give another short term extension to the Bush tax cuts. Here's the sad part: Even if the Bush tax cuts expire and the scenario outlined in the article comes true, our deficit will still continue to increase...just at a slower pace. America has become like a shopoholic who earns $2,000 per month but spends $10,000 per month. Increasing earnings to $3,000 a month and cutting spending to $8,000 a month is an improvement but still drives the credit card balance higher.
on October 1,2012 | 06:37PM
Kuniarr wrote:
Here's my take on what ails our economy. The money supply inside the US technically shrink by the millions each month. That because the US earns gigantic milions less in exports than it pays for the imports. Those are real money that goes out of the country. Real money because they represent the cost of actual products paid coming in and cost of actual products earned going out.

What replaces those real money are printed money from the Federal government whose income from taxes and fees are millions less than the money it spends.

The only way tp get the US out of printing more money is to improve our exports such that the US exports more than it imports.

Exporting more products creates jobs. Lots of jobs. And jobs increases the income of the Federal Government plus a lot of jobs reduces the need for a lot of spending by the Federal government. That is the way to reduce the deficit and improve the US economy. Real money leaving the country and being replaced by printed money is the root cause of the economic mess we are all in. And that's my opinion.
on October 1,2012 | 06:42PM
hawaiikone wrote:
True, but at the prices we charge, no one wants to buy what we have to sell. American ingenuity created products the world wanted in the past. Now they've all been copied and made cheaper. We have to create again, and simultaneously create that same demand again. In short, we need to again become a nation of producers rather than consumers.
on October 1,2012 | 07:16PM
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