The biggest tax increase in American history

Unless you have been away from planet Earth for the past two years, you know that under the Budget Control Act of 2011, many of the tax breaks established during President George W. Bush’s administration are set to expire on Dec. 31.

The act, passed in 2011 after Republicans and Democrats failed to come to an agreement over raising the nation’s debt ceiling, was intended to achieve $1.2 trillion in savings with automatic spending cuts of about $110 billion mandated each year for the next 10 years. The law is the latest blow back from the White House and Congress’ inability to deal with our fiscal and economic problems.

In addition, new Medicare related taxes are scheduled to take effect for those in higher income brackets in 2013, and the payroll tax holiday is set to expire at the end of the year. In total, the changes could amount to the biggest tax increase in American history.

Federal Reserve Chairman Ben Bernanke calls it “a massive fiscal cliff’ and the media have dubbed it “taxmageddon.”

If the Bush tax cuts are allowed to expire, the maximum capital gains tax rate will increase to 20 percent, while the maximum rate on ordinary income will jump to 39.6 percent. The next day a fiscal discipline known as sequestration will cut about $110 billion a year from federal programs.

Payroll tax rates, which were cut as a temporary stimulus in 2011 and 2012, will increase from 4.2 percent on wages up to $110,000 to 6.2 percent. After these cuts expire, Americans earning around $50,000 annually can expect to pay about $80 more in monthly taxes.

Some estimate that the average American can expect to pay about $3,500 more as a result of all the tax cuts due to expire while we are singing Auld Lang Syne. This is not the way to jump start consumer spending.

But wait, there’s more. Under the Affordable Care Act, starting in 2013 high income individuals with a modified adjusted gross income above $200,000 or married joint filers with a modified adjusted gross income above $250,000 will pay an additional 3.8 percent tax on net investment income, such as most long-term capital gains, interest (excluding municipal bond interest), and dividends that exceed those threshold amounts. This will greatly inconvenience the one percenters.

Taken together, it makes for a grotesque austerity program, especially when stagnant wages and high unemployment continue to plague low- and middle-income families working hard to make ends meet.

If all the provisions that make up the fiscal cliff come to pass, it would trim some 4 percent from the economy’s already paltry growth rate.

Between now and the end of the year, we will be entertained by both parties’ posturing as compromises are discussed to avoid the cliff. It will all sound good, but the litmus tests should be whether they do harm to the middle class and exacerbate the nation’s rising income inequality.

The top one percent of American society captured more than half of the income gains from 1993 to 2008. In 2010, the first full year of the so-called economic recovery, they captured 93 percent of all economic gains.

This inequality is more than a fairness issue; it is holding back economic growth by restraining consumer spending, one of the driving forces in our economy.

An agreement to avoid the fiscal cliff is possible, but a more likely scenario is that we will witness another master class in buying time and kicking the can down the road. These issues have been marinating for years and it is naive to expect that a presidential election can change our dysfunctional federal government.

So for all the happy talk we’re likely to hear about the fiscal cliff, the actual response to it is likely to be somewhere between a punt and a bunt. And that would be bad news for all of us.

originally published: November 17, 2012

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