'Fiscal cliff' would bring big tax hike

After-tax income would decline by about 6.2 percent next year, a new study says

Lori Montgomery / The Washington Post /

Published Oct 2, 2012 at 05:00AM

Nearly 90 percent of Americans would face higher taxes next year if Congress permits the nation to hurtle over the “fiscal cliff,” the year-end precipice of tax hikes and spending cuts that threatens to throw the nation back into recession.

A study published Monday by the nonpartisan Tax Policy Center finds that taxes would go up by a collective $536 billion next year, or about $3,500 per household, reducing after-tax income by about 6.2 percent.

But the impact would vary significantly by income level, the study found, ranging from a $412 jump for the lowest earners (a reduction of 3.7 percent in after-tax income) to $120,000 for the top 1 percent (a bite of 10.5 percent). Middle-income households — those earning between $40,000 and $65,000 a year — would see their taxes go up by an average of $2,000, the study found, leaving families with 4.4 percent less money to spend.

For most taxpayers, the bulk of the increase would be triggered by the scheduled expiration of tax cuts enacted in 2001 and 2003 during the George W. Bush administration. The expiration of President Barack Obama's payroll tax holiday, which shaves 2 percentage points off payments to Social Security, comes in a close second.

But the lowest earners would be hardest hit by the expiration of tax breaks enacted as part of Obama's 2009 economic stimulus package, the study found. Those losses would include an expansion of the earned income tax credit and the child tax credit for working families, as well as a $2,500 credit for college tuition, which would shrink to $1,800 and be available for only two years instead of the current four.

The fiscal cliff is the name given to a collection of changes in current law that are all set to strike in January. The bulk involves the scheduled expiration of tax policies — or, in the case of new taxes in Obama's health-care initiative, levies that are set to take effect for the first time, such as a new 3.8 percent tax on capital gains for high-income households.

The cliff also includes $110 billion in automatic spending cuts at the Pentagon and other federal agencies. The Tax Policy Center report only examines the effect of tax changes.

One striking conclusion of the study: Although the political debate has focused on the Bush tax cuts and whether they should be expired for high earners, the tax portion of the fiscal cliff is not monolithic. Instead, the Tax Policy Center identified nine categories of taxes, each with its own set of political considerations.

Researchers then ranked the changes according to the likelihood that they will take effect. Their conclusion: The payroll tax holiday will almost certainly be allowed to expire, decreasing the average worker's paycheck by about $80 a month.

However, analysts concluded, Congress is highly unlikely to let the alternative minimum tax expand to strike an additional 20 million families in April. Households making from $65,000 to $500,000 would take the hardest hit.

“That's something that's unlikely for Congress to want to embrace,” Tax Policy Center director Donald Marron said at a morning briefing for reporters.

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