Tax Foundation: The Fiscal Cliff: A Primer

Tax 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 Should PPACA be modified or repealed?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.

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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.