Will the fiscal cliff raise taxes on the middle class?

By David Rohde
November 29, 2012

With rising Democratic opposition to cuts in social spending and Republican leaders reiterating their opposition to raising taxes on the wealthy, talks on avoiding the fiscal cliff were at a standstill Thursday.

Officials on both sides of the debate say the political jockeying is likely to continue this week. But they warn that the details of a compromise must emerge next week if an agreement is to be reached in time.

Erskine Bowles, the co-chair of the bipartisan Simpson-Bowles deficit reduction task force, said on Wednesday that he was skeptical that a deal would be reached. Bowles put the chances of an agreement before the end of the year at roughly one in three.

“I believe the problem is that we are going over the fiscal cliff,” Bowles told The New York Times, “and I think that will be horrible.”

Bowles is right. While potential tax increases on the rich have dominated the political debate, a raft of taxes on the middle class will increase if an agreement is not reached. The scope will vary, depending on a person’s income. White House officials estimate that the average American family will pay $2,200 more in taxes next year if an agreement is not reached. But, if an agreement is not reached at all, even after the January 1 deadline, the increase could be higher, particularly for households that make over $100,000 a year. Here’s why:

Alternative Minimum Tax: An obscure tax created in the 1960s to ensure that the super-wealthy paid a minimum amount of tax, inflation and other factors have resulted in the AMT now applying to the four to five million Americans who make $200,000 to $1 million, according to the Washington Post. In recent years, Congress has enacted a “patch” that prevents the AMT from applying to Americans who make less. Unless an agreement is reached, no “patch” will be enacted, and another 31 million Americans will have to pay the tax.

The non-partisan Tax Policy Center estimates that over half of all married couples will owe an additional $4,000, the Post reported. And a third of families with children will have to pay the AMT as well; with parents of three or more children facing an extra tax of up to $4,700.

The center estimates that 84 percent of married couples that make a total of $75,000 to $100,000 and have at least two children will pay a significantly higher tax bill this year because of the AMT.

The impact would be much higher in some areas, with the number of AMT-paying taxpayers in New Jersey rising to 50.3 percent, the highest rate in the country, according to the Post. And the percentage of taxpayer paying the AMT in California, New York and Connecticut would rise to over 30 percent.

Given the breadth of the potential AMT increases, experts predict that Congress will enact a “patch” even if a broader agreement is not reached. For middle class families, let’s hope they are right.

Payroll tax: A payroll tax holiday that was enacted in 2010 is set to expire, according to the Fiscal Times. The tax holiday cut employee Social Security contributions by two percent for households that make less than $110,00 a year. The end of the measure could mean that the average American family pays another $1,000 in taxes per year.

Deductions: Increases in deductions that were part of the Bush tax cuts will expire. Marginal tax rates will change as well, as described in this Washington Post piece. Exactly how this will play out for families depends on multiple factors. One calculator that could help you estimate the impact on your family is here.

I believe a short-term deal will likely be made to not increase middle class taxes. Allowing that to happen would be political suicide. But I think the chances of a long-term deal are low. If politicians can’t agree with this type of a gun to their head, I doubt there will be an agreement any closer to the 2014 midterms. Even if the cliff is averted and middle class taxes don’t rise, our fiscal dysfunction is likely to continue.

PHOTO: U.S. President Barack Obama holds out his pen, saying he is “ready to sign”, as he delivers remarks at the White House in Washington November 28, 2012. REUTERS/Kevin Lamarque

2 comments

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Times of high unemployment are not times for cutting debt. Except fixing some problems that create it like dysfunctional trade policy. Times of high unemployment are times for talking about deferring payment of debt. Paying off debt is reducing demand for goods.

This whole debt deal should be deferred till normal unemployment.

The poor and the rich take a larger than average economic hit in recessions. But that is who they want to hit now.
The poor are laid off first (they not valued to begin with or they would not be poor). Businesses take a hit before they layoff workers. Professionals not related to sales are considered temporarily expendable employees during a recession.

Posted by Samrch | Report as abusive

I was looking for the recent analysis Reuters has done on wealth and income distribution which Mr Rohde was speaking about on MSNBC today (12/27/2012). I wanted to pass along a new game I invented called “A Little Game of Poker” which exhibits quite clearly (and I believe accurately) wealth distribution (and its unfairness)in this country.

“A Little Game of Poker”
By Charles A. Bowsher

Imagine a poker game where you are using 100 chips and a double deck of cards, but you throw away four twos from one of the decks. So now you have 100 chips and 100 cards to deal out. There are 100 players in the “imaginary” poker game. Each player is dealt the number of chips and cards that correspond to their share of our countries wealth. The wealthiest player in the game is dealt 37 chips and 37 cards. That’s right, one person in the game (the “one percent” you hear so much about) is dealt 37 chips and 37 cards. It is “fair” since the wealthiest 1% of our population own 37% of our countries wealth. So there he/she is with their 37 chips and 37 cards. The next player gets a corresponding number of cards based on their wealth. The result is that the first 20 players are dealt out 88 chips and 88 cards amongst them of the total 100 cards. The remaining 80 players are now essentially having to share 12 chips and 12 individual cards amongst groups of them. By the time you get to the last card, we now have 30 or more people having to share 1 chip and 1 card. Now answer another question. Do any of those (meaning us) 80 players even have a chance of winning this game? Not knowing any better, one might venture to say that the game is rigged. I certainly think it is. That is what I think Occupy wants us to come to grips with, and solve.

So when I hear someone say we are waging class warfare against the wealthy and that it is somehow wrong, I just remember the poker game they expect us to “play” in. Compared to the class genocide that has been waged against the middle and lower classes, a little class warfare just might be a rational, reasonable response. Seriously, how many more hands of their style poker will it take before the 1% own 99% of the chips/wealth? I’ll give you a big hint. It doesn’t progress mathematically, it progresses geometrically so that the old sign warning “The End is Near” carried by the Doomsayer is more and more accurate as each day passes

There are numerous way to restore some sanity and a little fairness to what has happened and what will happen. Big question for us though, is whether we are willing to take the medicine necessary to cure this ill?

What is that medicine? It can take various forms. Recognition, I think the first, most important thing is that there be widespread recognition that there has been gross unfairness for sometime in how profits and opportunities have been distributed in our country. Discussion, Wide ranging discussions that result in a gathering of ideas to change the future. The status quo can not be allowed to continue. Testing, Try out some of the new ideas. You get the idea.

The following preceded “A Little Game of Poker” description when I originally wrote this.

Many of the “Occupiers” were decried for their claimed “Wealth Redistribution” aims. Most who decry them don’t really have an idea what the actual wealth distribution is in the United States. Answer this question before you read further. How much wealth (meaning money, land and assets) are controlled by the wealthiest 20% in our nation? If you guessed 50%, you are to low. If you guessed 60%, you are two low. If you guessed 80% you are still to low. Don’t feel stupid if you got it wrong. It is just that it is such an outrageous number for you to contemplate that you couldn’t even imagine it. It is actually 88%! That’s right, I said 88%! Let me repeat that, 20% of our population controls 88% of our countries wealth, and they want more! In 2007 (when the Great Recession began) it was 85%. That’s right, the “lower” 80% of the populations share of our nations wealth is now down to 12% from 15%. (Figures are from the United States Section of a Wikipedia entry on Distribution of Wealth. The Wiki ariticle referenced a Forbes Magazine article by Deborah L. Jacobs titled “Occupy Wall Street and the Rhetoric of Equality. Whose link is shown below. http://www.forbes.com/sites/deborahljaco bs/2011/11/01/occupy-wall-street-and-the -rhetoric-of-equality/

Charles A. Bowsher

Posted by CharlesABowsher | Report as abusive