Tax Break

$452 billion tax hike in 2013: Taxmageddon by the numbers

May 23, 2012

As we wrote last month, 2012 is set up to be a perfect tax storm: a slew of tax breaks are expiring, mandatory spending cuts are looming, and it’s an election year. So rhetoric will be high, hard won compromise on tricky issues will be low.

Not taking action, however, will be costly. This week the OECD said that could lead to an economic slowdown in the U.S. in 2013.

Economist Marty Sullivan has counted up how much taxes will climb if some action isn’t taken and in this analysis gives some helpful background on how we got to a $452 billion fiscal precipice.

Sullivan spent time at the U.S. Treasury and Congress’ Joint Committee on Taxation, so he knows how the tax sausage is made and he predicts the post-election lame duck congress, more focused on office moves and next careers than complex tax riddles, will pass a short-term extension of a few months. Basically pushing off the inevitable and giving the incoming session a whopper of a welcome gift.

The expiration of tax breaks like the 2001/2003/2009 tax cuts, as well as the payroll tax cut, estate tax breaks, the R&D tax credit for businesses, combined with the cost of the Patient Protection and Affordable Care Act (“Obamacare”), and other sundry items, will add up to the overall tax increase in 2013 of $451.8 billion.

Over the next decade the cumulative tax jump is $5.8 trillion.

There are four key issues that make this conundrum such a challenge to fix, says Sullivan:

  1. the Bush tax cuts, which Obama renewed in 2009, for high-income households –  these alone represent half of that $5.8 trillion 10-year number
  2. the 15 percent rate on capital gains and dividends
  3. an extension of expanded unemployment compensation
  4. mandatory cuts to spending — enacted in August 2011 when Obama, facing down the statutory debt limit, signed legislation providing that if Congress didn’t find $1.2 trillion out of the deficit, 10 percent off defense and non-defense spending will be automatically cut

How do we fix this stalemate and avoid the fiscal cliff?

In a post on TaxVox, Howard Gleckman lays out the process former Congressional Budget Office Director Doug Holtz-Eakin offers as a viable path:

  1. Accept that that tax code is going to progressively apply higher rates to higher levels of income
  2. Decide on a top rate
  3. Agree how much revenue taxes must generate
  4. Eliminate enough tax breaks to get to that number

Now that doesn’t sound so hard.

A $452 billion anvil hanging over your head seems like it might be pretty good motivation.

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