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Home / Government / Huge tax increase looms at year-end ‘fiscal cliff’

Huge tax increase looms at year-end ‘fiscal cliff’

By Andrew Taylor
Associated Press

WASHINGTON — A typical middle-income family making $40,000 to $64,000 a year could see its taxes go as much as $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 Monday.

Taxpayers across the income spectrum would be hit with large tax increases, the Tax Policy Center reported 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 increase in the $6,000 range.

All told, the government would reap more than $500 billion in new money 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 increases, 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 increases and spending cuts has been dubbed a “fiscal cliff.”

“The fiscal cliff threatens an unprecedented tax increase at year end,” said 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, although 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 income of more than $250,000 to go back to Clinton-era rates of as much as 39.6 percent.

Republicans controlling the House also have 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 of more than $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.

Copyright 2019 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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