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Saturday, November 10, 2012

Tax Foundation: The Fiscal Cliff: A Primer

Tax Foundation logoTax Foundation, The Fiscal Cliff: A Primer:

The fiscal cliff is the culmination of a decade of “temporary” tax and budget bills that have postponed resolution of key policy differences. Should the tax code be used to heavily promote income distribution or aim instead to raise revenue in the least distortive manner possible? How large should federal spending be? Should PPACA be modified or repealed? Should there be a federal estate tax and if so, at what level? Should the payroll tax be reduced and if so, how should we fund Social Security and Medicare? What should Social Security, Medicare, and Medicaid look like as the population ages?

While most observers recognize the importance of dealing with the fiscal cliff before it happens, the divided political landscape can encourage brinksmanship to improve negotiating positions. No political actor wants the fiscal cliff to take permanent effect in full; the next few months will determine whether that happens anyways despite those intentions. Table 1 ... illustrates the revenue impact of the fiscal cliff provisions. ...

In 2001 and 2003, President George W. Bush signed into law significant tax reductions for nearly all taxpayers. These cuts included marginal rate reductions, the introduction of a new 10% tax bracket, an expansion of the child tax credit, and a variety of other provisions (see Table 2 for complete list). ...

The sheer size of the fiscal cliff in scope, importance, and dollars signifies the uncertainty faced by American taxpayers. With so much of the tax and budget system on short-term lease, and with the proposed permanent fixes so widely varying, speedy economic growth becomes untenable. While past practice suggests Washington will once again duct tape together another short-term extension and put off the hard choices, anything can happen.

Table 1: Tax Changes Taking Effect January 1, 2013

Tax Change

Tax Increase
(2013 over 2012)

Expiration of the 2001-03 tax cuts (not including estate)

$156 billion

Expiration of the payroll tax holiday

$125 billion

Failure to patch the Alternative Minimum Tax

$88 billion

Expiration of business expensing

$48 billion

Expiration of other “tax extenders”

$40 billion

New PPACA (Obamacare) taxes

$36 billion

Expiration of the 2009 stimulus

$11 billion

Estate tax increase

$10 billion

Total, Tax Increases

$514 billion

Source: Tax Foundation; CBO; Joint Committee on Taxation; Office of Management & Budget.

_


Table 2: Major Bush Tax Cut Income Tax Provisions, 2001-2013

Tax Category

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010-2012

2013*

Income Tax Brackets

--

15%

28%

31%

36%

39.6%

10%

15%

27.5%

30.5%

35.5%

39.1%

10%

15%

27%

30%

35%

38.6%

10%

15%

25%

28%

33%

35%

--

15%

28%

31%

36%

39.6%

Capital Gains Tax (max)

20%

16.7%

15%

23.8%

Dividend Tax (max)

39.6%

39.1%

38.6%

15%

43.4%

Estate tax (top rate)

55%

55%

50%

49%

48%

47%

46%

45%**

55%

Estate tax exemption

$675,000

$1,000,000

$1,500,000

$2,000,000

$3,500,000**

$1,000,000

 

PEP & Pease

 

Full

Minus 1/3

Minus 2/3

Repealed

Full

Marriage Penalty

Joint Filer = 1.67 x Single

Joint Filer = 2 x Single

Joint Filer = 1.67 x Single

Child Tax Credit

$500

$600

$1,000

$500

Source: Tax Foundation
*Absent further congressional action.
**Estate tax was repealed completely for calendar year 2010.

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Comments

The top estate tax rate for 2010-2012 was/is 35% and the exclusion amount was/is $5m (while the tax was repealed for 2010, estates could opt into it on these terms in order to receive a step up in basis for their appreciated assets). That these fundamental points are inaccurate in the chart makes me wonder how many of the other details are also wrong.

Posted by: Concerns | Nov 10, 2012 11:55:36 AM

If their incomes ar the same, it does not appear to be true that a couple 'married filing jointly' is paying the same tax as 2 'single' filers. Unless I am mistaken, and I am happy to be corrected, your table is incorrect.

Posted by: mark whitmire | Nov 12, 2012 8:23:07 AM

How DOES the Child Tax credit compare to the government's food stamp/welfare redistributtionist policies? If you actually work to care for your family are you less important, less visible in regards to policy amounts targeted to children?

Why isn't there a #1099-GOV so we could finally see the comparison about what government feels is important to support the family versus what they think we should be allowed to keep? YOu are clearly the expert on these matters.

This single issue, IMHO, proves there should be a guantitative measure for discussing these government allowed payments for children versus what you are allowed to keep for raising your own kids.

"#1099-GOV"=Fairness(Labor\2)

Solving this for various factors enables one to talk about entitlements in a way so that working always provides more benefit.
Labor\2= the maximum about government will be allowed to take from citizens before free working people object violently
Fairness=1 in general, but you can manipulate it via the electorate any way y0u want
When you end up solving this relationshiop is becomes clear that the working person should be allowed to retain, in tax credit, some factor greater than the government gift.

Surely you can comment on this.

Posted by: SenatorMark4 | Nov 12, 2012 8:26:35 AM

If you knew any other details were wrong, you would have said so. Stop concern trolling and back up your bullshit with facts.

Posted by: Brad S | Nov 12, 2012 9:55:55 AM

Ah.. but the beauty is....

Tax revenue will NOT rise, even if rates rise.

Everyone thinks the tax rates of the 90s were OK, and we can simply go back to them.

But we cannot :
1) Obamacare imposes a new 3.8% tax on capital gains.
2) Many states have increased tax rates much higher than they were in the 90s (California being the biggest example).
3) The US was a much larger percentage of world GDP in 2000 than now. Capital has more places to take flight to.

Returning to the tax rates of the 90s will cause revenue to stay the same or fall, rather than rise.

Posted by: TTT | Nov 12, 2012 2:36:22 PM

The chart on the linked pdf at the Tax Foundation Web site is correct as to the estate tax rates. There is a discrepancy between that chart and the html version of Table 2 above.

Posted by: Walter Sobchak | Nov 12, 2012 3:48:00 PM

From this Canadian, I'd be pretty willing to go over the fiscal cliff it were just the income tax rates- the additional revenue would be far higher and the economic impact of the tax increases in the lower brackets is actually less than that of raising the top bracket. But the capital gains and dividend tax increases would be far more harmful. So a compromise is needed, and something in the realm of Boehner's outline makes sense. I do think it's time for Republicans to recognize that the super-rich are not their friends, and be willing to raise further revenue from them, be it in the form of a tax on total wealth, a surtax on incomes over 1m, or an overall cap on exemptions.

Posted by: gabriel | Nov 12, 2012 6:56:27 PM