The Looming Fiscal Cliff 2013

Fiscal Cliff 2013With the first presidential debate of 2012 now over, I’m a bit surprised to say that the fiscal cliff was not mentioned. Perhaps this is a topic for an upcoming debate. I expect it to become a campaign issue over the next five weeks as the presidential election approaches because it’s something that will affect almost all voters.

If you aren’t familiar with the fiscal cliff, or as some have dubbed it, “taxmageddon”, let me briefly explain. In 2013, as it currently stands, nearly all of the temporary tax cuts enacted since 2001 will expire. If all of these tax cuts were to expire, approximately 90% of Americans would see their tax bills increase. If Congress and the president do not act, taxes will jump for nearly everyone and government spending will decrease significantly.

In summary…

  • Millions of families would be thrown into the Alternative Minimum Tax (AMT) bucket
  • Nearly ten times as many estates would be subject to estate tax as were in 2012
  • The 2% temporary payroll tax reduction would lapse
  • Bush tax cuts for dividends and capital gains would expire
  • Bush income tax cuts expire, increasing the nominal tax rate for high-income earners from 35 to 39.6%
  • The Affordable Care Act (Obamacare) would impose new taxes on high-earners

All told, it’s estimated (by the Tax Policy Center) that taxes would jump by $500 billion in 2013. Middle-income taxpayers would see average increases in their tax burden of approximately $2,000. Every level of income would see its tax burden increase. Low income households would see an increase of 3.5% of pretax income, while those in the top 1% would see an increase in their tax burden of approximately 7% of their pretax income.

While this cliff is significant, it’s not a reason to run for the hills. The Tax Policy Center has evaluated which provisions are likely to expire, and which are likely to be renewed, based on proposals by Obama and Romney, as well as proposals and discussions from Congress.

It appears that the payroll tax reductions that were part of the stimulus to fight off a Depression will be allowed to expire, as expected. These were temporary cuts and I think that their impact has run its course. Rolling these back will affect all workers, and represent about $115B of the total $500B in looming tax increases. The Bush dividend and capital gains reductions are also likely to expire for high-income individuals. It’s no secret that the wealthy disproportionally benefit from lower taxes on capital gains and dividends. Keeping these rates lower for those earning less than $250k per year will encourage savings without allowing the rates to be taken advantage of by those who do not need reduced rates.

As expected, the fiscal cliff may affect taxpayers differently depending on who the next President is, and which party controls Congress. The Republican party has shown its desire to repeal Oabamacare (which will increased taxes paid by the wealthy), although this seems unlikely to happen in any quick fashion. Republicans would also defer to repeal the income tax increase that is set to take effect for the top income bracket. President Obama expressed the desire to make stimulus legislation like the Earned Income Tax Credit permanent, while Mitt Romney has said that he would allow this legislation to expire. The two also differ on the treatment of Bush era tax cuts. President Obama has proposed extending the Bush tax cuts for all except those making more than $250,000 per year, while Romney supports extending these cuts for all taxpayers.

The fiscal cliff in its entirely is unlikely to materialize. We aren’t going to see $500B in increased taxes in 2013. However, there are definitely some proposals that I would like to see pushed through, and others I hope will be left alone to be as they are, or expire. The payroll tax has run its course and should be allowed to expire. While this will impact all workers, I don’t think that the payroll tax cut is having as much impact anymore as it is currently costing us. This tax cut costs 5x as much as the increased taxes on the wealthy as part of Obamacare. I would also like to see dividends and capital gains increase on those earning more than $250k per year because there is no reason why we need to encourage investment amongst those who are earning that much. I do hope that an AMT patch is pushed through to keep millions of Americans from being forced into AMT, and I also support extending the tax cuts for the working class.

Where do you fall in regards to the looming fiscal cliff? Should everything be extended? Should nothing be extended?

(Photo: Flickr)
Check out the analysis from the Tax Policy Center