Will the fiscal cliff raise taxes on the middle class?
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